Globalising a culture of excellence

Thursday, 01 Jan 2015

Stephen Schwarzman - $284 billion Blackstone Founder on investing in African growth

Stephen Schwarzman is so philanthropically-minded itís easy to forget that he also controls one of the largest asset management companies in the world. As Co-founder, Chairman and CEO of Blackstone, Schwarzman has over the years built the company into a multibillion-dollar global investment behemoth.

As part of Africa investorís ongoing Ai CEO Conversation Series, Hubert Danso spoke to Schwarzman about getting his start, Africaís energy needs, and meeting George Bush on Parentsí Day.

How would you define your education in relation to your subsequent career?

I was very lucky actually. I was educated in the United States in public schools and one of the biggest advantages I had in my life was being admitted to Yale. Besides the kind of education I received, I met some really fascinating people who were part of not only the business establishment, but the political establishment.

For example, in my dormitory, George Bush (43rd President of the United States) was a year ahead of me so Iíd see George every day in the dining room and I met his father, who would also turn out to become President of the United States, at a parent weekend. There was a real tradition at Yale of public service and a global look at the world, which was completely alien to my upbringing. It was a very expansive part of my education.

Harvard Business School was absolutely terrific because it provided a whole framework of how to think about business, which was also somewhat new to me, and those educational experiences were quite transformative.

I graduated business school in 1972 and as a fifth-year associate at Lehman [Brothers], I handled the second-biggest merger transaction in the world at the time, and I did that with no senior person involved. This was a pretty transformative moment for me growth-wise, as I had never done a merger before. It was really scary to be in that position as a 29-year old but it launched me in a career in the merger area, which at that point was a relatively new business in Wall Street.

So I take it, the fact of being with both the Bushes and studying at Yale and Harvard isnít your way of indirectly announcing your presidential candidacy for the next elections!?

[Laughs] Oh I donít think so! Iím very happy where I am, and happy with all my philanthropic activity. I only mentioned it because it just shows you the randomness of life and the people you bump into when youíre younger. If youíre in the right kind of environment, it helps you think about options in the world and different types of potential careers; if you just didnít have those opportunities, you wouldnít be thinking about them.

You clearly have an aptitude for leadership. How do you think your children would describe you as a leader, and how would you characterise your leadership style?

I donít think my children would describe me as a leader! I think theyíd describe me as a lovable dad.

My leadership style has evolved and itís always still evolving. When I started Blackstone at 37 years old, I knew very little about management. But Iíve always been a very strong leader; it was a natural kind of position for me.

As a manager and CEO for almost thirty years now, Iíve learned a lot and my style is to identify a vision and create a culture where we can attract enormously gifted, highly ethical people that want to buy into a culture of excellence. Part of my job is to create that environment and hire those really gifted people, and set a framework where every decision we make can be discussed openly. As a leader, I strive for a workplace where people are expected to put on the table any problem they see, so that we can make the best decisions possible together.

And every once in a while, when we think the organisation is becoming too conservative risk-wise, itís my responsibility to tell people about that; discuss it and gently change our course.

Part of my leadership style is to help people understand that everybody at the firm can be a winner and can have a great career. Weíre prepared to start new businesses and give everybody the opportunity.

Creating that platform to inspire your colleagues must take quite a bit out of you. How do you relax when youíre outside of the office? How do you spend your spare time?

Thatís a great question because Iím very fortunate in that I seem to have enormous amounts of energy. I sleep somewhere between four or five hours a night; Iíve been doing that for decades. If youíre up longer, you can accomplish more.

Technology has made time off not so much time off anymore because you can always be reached and in our kind of business, where you have a very large asset base, that leaves you more or less like a doctor; always available for consultation and house calls.

But leaving that aside, in the spare time I do have, I like to be some place thatís on water; I like to be on a boat or a place where I can play tennis. I like to read and watch sports, either live or on television. I also like travelling. I go all over the world constantly and I take my wife with me on some of those trips. We also visit our seven grandchildren, who are all in New York.

Moving on to Blackstone, how has it met and possibly exceeded your expectations?

Iíve been very pleased with the growth of Blackstone. Our 81 portfolio companies currently have US $83 billion in revenue. And thatís without our real estate activity, which is the biggest in the world.

In other areas, we have $284bn of assets; weíre without question one of the largest asset management businesses, so Iím very pleased and proud of what weíve done, and weíve only just gotten going.

How were you introduced to Africa and what does the continent mean to you from an investment and returns standpoint?

Africa is an interesting place, because it has very high growth rates off of a very low base. We got involved in Africa through our first experience with Kosmos; we helped to organise a company to drill for oil and found it offshore, and the fact that we found a very large deposit certainly gave us an excellent first impression of Africa.

We then got involved in the Bujagali project in Uganda, which is a very important project. It lowered the price of electricity dramatically and, for the first time, Uganda doesnít run out of power. Usually it had run-off periods of about 12 hours a day, off and on, but now theyíre in electricity surplus. This means that the growth rate in Uganda has gone up materially, in the area of 60% improvement on the growth rate.

And so the benefits of providing electricity, in this case a renewable resource in hydro, is really important and, through that project, weíve learned a lot about sub-Saharan Africa and the dramatic need to empower.

The idea that 70% of people in sub-Saharan Africa donít have electricity is astonishing and unfair from a moral position. Mimi [Alemayehou], who is serving as our Executive Advisor and Chair of Blackstone African Infrastructure, introduced us to Aliko Dangote [Founder, President and CEO of the Dangote Group] and weíve put together $5bn of venture to invest in power, and so weíre quite excited about that. Thereís such a dramatic shortage of power in sub-Saharan Africa that there are a lot of very interesting projects where we think we can do well financially, but where we can also do well for the people. Without electricity infrastructure, an economy canít grow nearly as rapidly.

Talk about your view on Africaís project pipeline and what your exit strategy is, and whether African capital markets in the future could become a viable exit route.

I think there are a number of different ways to play African growth. Blackstone tends to like the bigger things with pretty predictable outcomes, rather than smaller things with large dispersion. And the shortage of power in sub-Saharan Africa is so profound that there are immense opportunities through our partnership with the Black Rhino Group that weíve established to invest in the region with Aliko [Dangote] and also with local partners to take advantage of this.

I read Jeff [Immelt]ís interview in your magazine (Africa investor, March-April 2014), where he talked about the massive need for dollar numbers for power, which is significantly more than we could ever provide at Blackstone. And so we think thereís a great opportunity of scale to put money out at good rates of return.

Exiting in Africa is always an issue because most of the capital markets are quite modest. These projects are cash-flow positive, once theyíre built, and so the way we would exit would be to sell these projects to commercial investors around the world.

Whatís your risk mitigation strategy on the continent?

Our approach to risk mitigation on the continent of Africa is similar to our approach in most markets. We team our skills acquired through our vast experience around the world with those of the best local partners. This is one of the reasons we teamed up with Aliko Dangote in Nigeria; for his unique knowledge of the country and of the region.

What are your key projects to close in 2015 and what are your goals for your Africa business in 2015?

We are working on large infrastructure projects in a few key markets including Nigeria, Ethiopia, Mozambique and others. We are confident we will make significant progress on these in 2015 and could possibly come to financial close on one of them. These are large complex projects that take time to develop, but we have put together a great team to move them forward. Additionally, we are working with the relevant governments to ensure these projects meet their long-term needs.

What are the three or four practical steps that the global investment community can take to initiate investment in Africa in 2015?

First, itís important that investors recognise that Africa is not one country, but 54 unique countries, each with distinct opportunities and challenges. At Blackstone, we have selected a few high growth countries, where we also have strong partners on the ground.

Secondly, and it bears repeating, establishing local partnerships is critical. Thatís why we formed this partnership with Dangote Industries to invest $5bn over the next five years in energy infrastructure projects across sub-Saharan Africa. We have experience developing projects around the world, but it helps to have a strong local partner with demonstrated success growing businesses and local knowledge we can leverage.

Third, we are proud of the team that we have put together to work on our infrastructure platform for Africa. We felt that in order to develop the large transformational infrastructure projects we are undertaking, our teams had to be based in Africa for the long-term. The entire staff of the Black Rhino team, including the senior management, is based in Africa.

Additionally we have recruited top-notch Africans who are eager to contribute to the development of their continent.

Ten years from now, what do you expect Africa to represent in terms of global economic influence?

Over the last ten years or so, most African countries have experienced significant economic growth. Many countries have gone through tough macroeconomic reforms and put in place appropriate investment and regulatory frameworks to attract the private sector.

At the same time, Africa has experienced more democratic elections in the last ten years. Foreign direct investment has gone from $15bn in 2002 to $46bn in 2012. Fast-forward to now and Africaís collective GDP, at $1.7 trillion, is almost equal to Brazilís. It is the fastest growing continent in the world. In the next ten years, I expect this growth to continue as countries strengthen their institutions including their capital markets, investment laws and governance.

Additionally, Africaís own private sector will have more of an increased role in its development than in the previous decade. Dangote Industries is one example but you will see an increase in the number of African industrialists, bankers and entrepreneurs from many sectors driving this growth.

What is the mindset at Blackstone going into 2015?

By all measures, 2014 has actually been a terrific year for Blackstone, underscoring our ability to navigate challenging geopolitical and economic circumstances. Our investors trust us to manage more of their assets than ever before. However, we donít take our success for granted.

Going into 2015, we will continue to keep our finger on the pulse of changing market conditions while applying the same analytical rigor responsible for our current success.

Schwarzman Scholars
Schwarzman has recently established the Schwarzman Scholars programme; a study programme that will allow students from all over the world to obtain their Masterís Degrees from Tsinghua University in Beijing. As he became increasingly aware of Chinaís rising economic power, Schwarzman saw an opportunity for dialogue: "When you have a rising power of any type, in this case China, it usually changes the world order and that typically creates friction." He explains, "I saw it logically from a historical perspective. Additionally, risks exist when you have a wide cultural divide, which often leads to misunderstanding."

This concept serves as the basis of the Schwarzman Scholars programme, which is modelled around that of the Rhodes Scholar programme: to "attract a group of extraordinary people from around the world to go to China for a year and have the opportunity to meet the leaders of the country, go on trips around the country, and get a mentor from the real world in China in their area of study so that they can evolve into future leaders in their fields when they go back to their countries of origin."

Recognising the growing importance of Africa, the Schwarzman Scholars programme will also include African students. "This isnít a programme just designed for US-China relations," Schwarzman says. "Out of 200 a year, 20% will be from China, 45% from the United States, and 35% will be from the rest of the world, this is a global programme."

"In this way," he says, "[over 50 yearsí time] we will set up 10,000 Schwarzman Scholars who will be able to interpret and hopefully modify relations between countries."

Schwarzman Scholars Honorary Advisory Board members:
* Nicolas Sarkozy, Former President of France
* Brian Mulroney, Former Prime Minister of Canada
* Henry Kissinger, 56th United States Secretary of State
* Condoleezza Rice, 66th United States Secretary of State
* Robert Rubin, Co-Chairman of the Council on Foreign Relations and 70th United States Secretary of the Treasury
* Sir James Wolfensohn, 9th President of The World Bank Group
* Richard Levin, President, Yale University
* John Thornton, Chairman, The Brookings Institute
* Tony Blair, Former Prime Minister of Great Britain and Northern Ireland
* Kevin Rudd, Former Prime Minister of Australia
* Colin Powell, 65th United States Secretary of State
* Henry Paulson, 74th United States Secretary of The Treasury, Chairman of The Paulson Institute
* Richard Haass, President, Council on Foreign Relations
* Richard Brodhead, President, Duke University
* Yo-Yo Ma, World-Renowned American Cellist
* Bob Dudley, CEO, BP
* Sir Colin Lucas, Former Vice-Chancellor, University of Oxford and Former Warden, Rhodes Trust

Credits: Africa investor