Blackstone’s $26bn haul backs Schwarzman’s ‘go big’ thesis

Blackstone collected $26 billion in capital commitments for its Capital Partners VIII fund – the largest private equity fund ever. A total larger than the assets many private equity firms manage. Is anyone surprised? Well, they shouldn’t be.

The end result of BCP VIII is emblematic of the credo co-founder Stephen Schwarzman lays out in detail in his memoir, What It Takes: Lessons in the Pursuit of Excellence.

“I had reached an important conclusion about starting any business: it’s as hard to start and run a small business as it is to start a big one,” he wrote. “So if you’re going to dedicate your life to a business, which is the only way it will ever work, you should choose one with the potential to be huge.”

And the most recent vehicle only adds to the firm’s fundraising track record. Including Fund VIII, the firm can lay claim to three of the 10 largest funds raised post-global financial crisis. The others are the $16.4 billion Fund VI and the $18 billion Fund VII.

As Blackstone readies deployment of its gargantuan Fund VIII, the firm still must contend with stratospheric valuations.

“You always worry when prices get higher,” Schwarzman told sister publication Private Debt Investor. “Someone is always justifying a reason to pay more or do something that’s not necessarily the right thing to do. Whether it’s [public market] valuations that are half or less of what private rounds were, sometimes markets simply get ahead of reality. Interest rates are very low, and lots of capital [is] available. It’s more of a warning that you have to be particularly alert right now because of those types of indicators.”

Schwarzman’s go-big-or-not-at-all philosophy has played out well for the firm. The product set the world’s largest private equity firm offers continues to grow. Recently, it unveiled a life sciences fund and a growth equity vehicle.

The billionaire private equity mogul also jumped in the alternative credit asset class early. After raising two mezzanine funds around $1.1 billion, the firm acquired GSO Capital Partners in 2008. Shortly after Blackstone’s IPO in June 2007, Schwarzman, who had approached GSO previously, received a call from Bennett Goodman with an offer: let’s merge.

“They said, ‘we looked at your prospectus. Look[ed] at how fast you grew, and if we were affiliated with you, we’d be able to take our business’ – which at that point had $6 billion of assets – ‘and we could build it into something much, much bigger as part of Blackstone,’” Schwarzman said.

As he built Blackstone, Schwarzman had another maxim: don’t miss a can’t-miss opportunity. In fact, it was what led him to build the firm in the first place.

While a partner at Lehman Brothers, Schwarzman had tried to launch a leveraged buyout fund, but the investment bank’s executive committee resisted. In 1986, the moment had not left, but Schwarzman felt the opportunity could slip away if he and fellow Blackstone founder Pete Peterson hesitated.

“I’m convinced that now is the right moment to raise a [buyout] fund and that moment may never reappear for us. We’ve got to hit it,” Schwarzman told Peterson at the time, according to the book.

For Schwarzman, the idea of a can’t-miss opportunity is eternal.

“There’s always another one. You just don’t know what it’s going to be. I was at one of our group meetings [recently], and they were playing around with an idea, they saw something in the markets. It could be really huge, if it works,” he said.

However, he keeps his cards close to his chest.

“I can’t tell you what exactly will be next,” he said. “If I knew I wouldn’t tell you because there are no patents in finance. People can copy what we do, and now many people have learned that is a good thing to do. We don’t want to give away our secrets prematurely.”