Today I had the opportunity to meet Tony James who is the President and Chief Operating Officer of Blackstone. He is definitely a master of the universe and he spent an hour taking questions from a small group of people at the Foster School of Business. During the conversation he touched on a range of topics of which I will touch on a few of them here.
I asked about the work he did to create a more disciplined investment process at Blackstone when he arrived. Amongst the many things that he did, I liked hearing about the investment funneling process. Each person who has an investment idea drafts a memo that is vetted before a lot of resources are committed. This enables ideas that make it through the funnel to get the right level of attention and have a higher chance of making it to an actual investment.
Previously when people worked in a silo there was often duplication of research with people not knowing what others were doing. By bringing all of the investment ideas to a central committee it gave Blackstone’s leaders a better perspective of what was going on while reducing wasted effort. This reminds me of the Bill Gates reviews where he was able to know everything that was going on at Microsoft and gave him a comprehensive view of what was going on in technology.
Investment firms all tend to focus on the same things (e.g. sourcing, valuations, investments, etc.) but what sets firms apart is culture. It is the only long-term competitive advantage that firms have. Culture is often seen as a “fuzzy” thing but when you look at what it has done for Blackstone it is truly effective.
Although Blackstone is known for Private Equity it is not the largest business that the firm has. Looking forward there has been a lot of talk of winnowing the number of firms that will exist in the future. He has been hearing this for a long time and doesn’t feel it will be as bad as people think but he did mention some challenges moving forward. The items that stuck with the most are:
- Acquiring a public company often takes a 40% premium to take it private and then when it IPOs there is often a 20% discount. So there is a 60% enterprise value hurdle that needs to be overcome to just breakeven.
- Buyouts are an operational business. The economics of the business requires operational changes to make a profit. If the operational changes can’t be made it is not worth doing. This is contrary to the popular opinion that private equity is only about financial engineering.
- Deep domain expertise are needed to create the operational improvements.
- Firms with a diverse range of strategies and track records in different markets will do better than specialty firms.
With Mr. James’ broad view of the markets he had several interesting facts and tidbits of which I will only touch on a few.
- $1 – 1.5 trillion has been spent on private equity acquisitions in recent years (I missed the exact time period). Equities were propped up as a result. With a holding period of approximately 5 years, there could be downward pressure on equities when these companies get ready to IPO.
- When buying companies in foreign markets it is important to have native investors who are steep in the culture and also have a geo-political hedge.
- Bad industries are ones where the risk associated with the investment is unknown. Especially with those that have lots of risks but no real upside. Pricing risk is an important part of the investment decision.
- Frequently reviewing investment opportunities creates investment acumen. There is no substitute.
He is definitely a personable guy and answered all of our questions until he had to leave for the Costco board meeting. Thank you Paula Rosput Reynolds and the Foster School of Business for setting this up.
Talk to you soon,
Orville | Twitter: @orville_m