What It Takes: Lessons in the Pursuit of Excellence

by Stephen A. Schwarzman

But I’ve always believed that it’s just as hard to achieve big goals as it is small ones. The only difference is that bigger goals have much more significant consequences. Since you can tackle only one personally defining effort at a time, it’s important to pursue a goal that is truly worthy of the focus it will require to ensure its success.

“The best executives are made, not born. They absorb information, study their own experiences, learn from their mistakes, and evolve.”

We are strong believers in innovation and growth—constantly asking questions in order to anticipate events so that we can evolve and change before we are forced to.

If you want something badly enough, you can find a way. You can create it out of nothing. And before you know it, there it is.

I believe that education is a discipline. The object of this discipline is to learn how to think. Once we have mastered this we can use it to learn a vocation, appreciate art, or read a book.

The balance sheet had footnotes referring to preferred stock and convertible preferred stock, subordinated and convertible subordinated debt, senior debt and bank debt.

Companies ask banks for fairness opinions when they want an objective evaluation of the price to be paid in a transaction.

Getting to know Jack and watching him in action reinforced my growing belief that the most important asset in business is information. The more you know, the more perspectives you have and the more connections you can make, which allow you to anticipate issues.

The fix, I found, was to focus on my breathing, slow it down and relax my shoulders, until my breaths were long and deep. The effect was astonishing. My thoughts became clearer. I became more objective and rational about the situation at hand, about what I needed to do to win.

In my relatively short career, I had learned that deals ultimately come down to a few key points that matter most to each side. If you can clear everything else away and focus on these points, you will be an effective negotiator.

I rarely take notes in meetings. I just pay very close attention to what the other person is saying and the way he or she is saying it. If I can, I try to find some point of connection, an area of common ground, a shared interest or experience that turns a professional encounter into a more personal one.

There is nothing more interesting to people than their own problems. If you can find out what they are and come up with solutions, they will want to talk to you no matter their rank or status.

A classic LBO works this way: An investor decides to buy a company by putting up equity, similar to the down payment on a house, and borrowing the rest, the leverage. Once acquired, the company, if public, is delisted, and its shares are taken private, the “private” in the term “private equity.” The company pays the interest on its debt from its own cash flow while the investor improves various areas of a business’s operations in an attempt to grow the company. The investor collects a management fee and eventually a share of the profits earned whenever the investment in monetized. The operational improvements that are implemented can range from greater efficiencies in manufacturing, energy utilization, and procurement; to new product lines and expansion into new markets; to upgraded technology; and even leadership development of the company’s management team. After several years, if these efforts have proved successful and the company has grown considerably, the investor can sell it for a higher price than he or she bought it, or perhaps take the company public again, earning a profit on the original equity investment. There are a lot of variations on this basic theme.

Unlike M&A, LBOs didn’t require a constant stream of new clients. If we could persuade investors to put money into a fund, locked up for ten years, we then had ten years to earn management fees, improve what we bought, and turn a big profit for our investors and ourselves.

As M&A bankers, we would be running only a service business dependent on fees. As investors, we would have a much greater share in the financial upside of our work. In private equity firms, general partners identify, execute, and manage any investments on behalf of limited partners (LPs), the investors who entrust them with their money.

The general partners put their own capital up alongside the LPs, run the investment business, and tend to be rewarded in two ways. They receive a management fee, a percentage of the capital committed by investors and subsequently put to work, and a share of the profits earned from any successful investments, the “carried interest.”

The appeal of the private equity business model to a couple of entrepreneurs was that you could get to significant scale with far fewer people than you would need if you were running a purely service business. In service businesses, you need to keep adding people to grow, to take the calls and do the work. In the private equity business, t...

Pete and I thought of the people we wanted to run these new business areas as “10 out of 10s.” We had both been judging talent long enough to know a 10 when we saw one. Eights just do the stuff you tell them. Nines are great at executing and developing good strategies. You can build a winning firm with 9s. But people who are 10s sense problems, design solutions, and take the business in new directions without being told to do so. Tens always make it rain. We imagined that once we were in business, the 10s would come to us with ideas and ask for investment and institutional support. We’d set them up in fifty-fifty partnerships and give them the opportunity to do what they did best. We’d nurture them and learn from them in the process. Having these smart, capable 10s around would inform and improve everything we did and help us pursue opportunities we couldn’t even imagine yet. They would help feed and enrich the firm’s knowledge base, though we still had to be smart enough to process all this data and turn it into great decisions.

If we could attract the right people and build the right culture at this three-legged business, offering M&A, LBO investments, and new business lines, all feeding us information, we could create real value for our clients, our partners, our lenders, and ourselves.

As an investment banker and later as an investor, I found that the harder the problem, the more limited the competition.

“greenmail.”

when investors put money in a fund, they want to know that theirs isn’t the only money.

investors would expect us to build a diversified portfolio.

I had come to understand that success is about taking advantage of those rare moments of opportunity that you can’t predict but come to you provided you’re alert and open to major changes.

offering memorandum—the legal document that explains the terms, risks, and objectives of an investment—and

Their plan included a list of the assets they wanted to buy and sell, the people they needed, and the profits they could make.

He had done well enough on brokerage fees, but now he saw the chance to make much more as an owner and developer.

The way to avoid this type of situation is to invest only when values have recovered at least 10 percent from their lows. Asset values tend to increase as economies gain momentum. It’s better to give up the first 10 to 15 percent of a market recovery to ensure that you are buying at the right time.

While most investors say they are interested in making money, they are actually interested in psychological comfort.

We train our professionals to distill every individual investment opportunity down to the two or three major variables that will define the success of our investment case and create value.

The second problem was that the big firms on Wall Street at that time were more like tribes than businesses. For someone to leave Goldman Sachs to join Morgan Stanley was like a Comanche leaving to join the Mohawks.

At Lehman, I had realized that I spent more time at the office than at home, so I wanted a beautiful environment.

Another common practice we found in real estate was retrading. Late in a deal, after terms had been agreed, even at the closing, we found buyers would threaten to pull out unless they got a lower price.

In the years after that, Jon developed two major insights that accelerated the growth of our real estate business. The first was to use collateralized mortgage-backed securities (CMBS) to make bigger acquisitions. CMBS were new securities. Traditionally, if you needed a loan to buy a commercial property, you borrowed from a bank or another big institution. With these new securities, a lender could package your loan with other loans into a tradable security and sell them to investors. It turned your loan into a more liquid and tradable asset.

Jon’s second insight was that public companies containing lots of properties were frequently valued at less than the sum of their parts.

We applied our usual three tests for a new line of business. It must have the potential to be hugely rewarding for investors. It must add to Blackstone’s intellectual capital. And it must have a 10 in charge of it.

But one of the great things about the entrepreneurial experience is that over time, if everything works out, life does get easier. As your business matures, the quality of the people around you gets better and your systems become more consistent.

I have always been aware of the profound influence that education has had on my life. Without moving to the high-quality Abington school system in Pennsylvania, I would never have been able to qualify for Yale or Harvard Business School, which subsequently opened many important possibilities for me.

Bill wrote me back a nice note, saying he would be available for crucial meetings or for direct input but he simply doesn’t join groups.

If we were going to break up the Forum, though, I wanted us to do so as a group, not as individuals peeling off one by one.

Asset management firms are so dependent on people and personalities that succession often becomes their Achilles’ heel. One generation stays on too long, the next generation gets tired of waiting, and firms lose momentum. Regaining that momentum is always much harder than sustaining it. So if leaders don’t want their organization to tire, they have to start working on succession when their drive, their intellect, and their competitiveness are yet to peak.

Write or call the people you admire, and ask for advice or a meeting. You never know who will be willing to meet with you.

There is nothing more interesting to people than their own problems. Think about what others are dealing with, and try to come up with ideas to help them.

When you’re young, only take a job that provides you with a steep learning curve and strong training. First jobs are foundational. Don’t take a job just because it seems prestigious.

Believe in something greater than yourself and your personal needs.

Your integrity must be unquestionable.

If you see a huge, transformative opportunity, don’t worry that no one else is pursuing it. You might be seeing something others don’t. The harder the problem is, the more limited the competition, and the greater the reward for whomever can solve it.

In tough negotiations especially, keep everyone at the table long enough to reach an agreement.

Make decisions when you are ready, not under pressure. Others will always push you to make a decision for their own purposes, internal politics, or some other external need.

Failure is the best teacher in an organization. Talk about failures openly and objectively. Analyze what went wrong. You will learn new rules for decision making and organizational behavior.