July 23, 2024

Steve Schwarzman’s top tips for investing in a volatile market

The Blackstone chief executive shares five pieces of advice – including his 10% rule when it comes to valuations – with Private Equity International.

Blackstone reached a key milestone at the end of the second quarter this year, hitting $1 trillion in assets under management. The turning point comes two years shy of the alternatives asset manager’s 40th anniversary.

The achievement was “significant in many ways, including for me personally”, chief executive and co-founder Stephen Schwarzman said on the firm’s second quarter earnings call. “We’ve delivered for [investors] in good times and bad, generating $300 billion of aggregate gains with minimal losses. In fact, virtually all of our drawdown funds we’ve launched in our history have been profitable for our investors.”

With its roots in private equity, Blackstone’s business now sprawls multiple private markets strategies. It also continues to build its investor base, making headway with its private wealth expansion.

Schwarzman recently shared his top tips for investing in a volatile market with Private Equity International.

Look for the mega-trends

“It’s easy to get caught up in short term-volatility. But if you have the benefit of being a long-term investor, don’t lose sight of the mega-trends. We spend a lot of time building conviction on where the world is moving. Over time, being in the ‘right neighbourhoods’ can matter more than just picking the ‘right house.’ There are usually ways to play these themes across asset classes. Take the continued digitalisation of our lives – we’ve invested from online dating to the brick-and-mortar warehouses behind e-commerce. Or the rise of AI, we have found opportunities in technology companies themselves as well as data centres powering AI.”

Spotting market tops and bottoms

“Tops are relatively easy to recognise. Timing the bottom of a cycle is tougher, and it’s often a bad idea to try. The reason is that it typically takes a year or two for an economy to really emerge from a recession. Even when a market starts turning around, it still takes time for asset values to recover. This means you could be investing at the bottom with no return for some period of time. The way to avoid this is to invest only when values have recovered at least 10 percent from their lows. It’s better to give up the first 10 to 15 percent to ensure that you are buying at the right time.”

Depersonalise and de-risk the investment process

“At or near bottoms, there can be a lot of excitement about the upside. Our investment discussions focus almost exclusively on the downside. It is the job of everyone in the room to find and handicap potential risks. An ‘only criticism’ rule allows us to critique proposals without worrying that we might be hurting someone’s feelings. After a few rounds of this, we hope, there are no longer any nasty surprises lurking in the deal. And because every partner on our investment committee participates in assessing a proposed investment, they also share responsibility for whatever decision is made. We all own the outcomes.”

Make decisions when you are ready, not under pressure

“Volatility adds time pressure. But we insist that anyone with a proposal has to write a thorough memo and circulate it at least two days before any meeting so it can be carefully and logically evaluated. Finance is full of people with charm and flip charts who talk so well and present so quickly you can’t keep up. The two-day requirement gives readers time to mark up the memo, spot any holes, and refine their questions. We want a dispassionate and objective review of deals – not decisions made under pressure.”

But time wounds all deals

“When you’ve reached consensus around an investment, move quickly. Time wounds all deals, sometimes even fatally. Often the longer you wait, the more surprises await you. In tough negotiations especially, keep everyone at the table long enough to reach an agreement.”

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