Schwarzman on Hedge Funds, Private Equity and Presidential Politics

Blackstone Group cofounder, chairman and CEO Steve Schwarzman offered a wide-ranging view of an uncertain world at Delivering Alpha 2016 in an interview with CNBC’s Becky Quick. Blackstone has been the recipient of funds shifting out of low-performing hedge funds and into private equity funds, including Blackstone’s. “PE is an asset class where you have control and can drive returns. And financing is very cheap. [PE] is a wonderful asset class but illiquid.” Blackstone has recently been selling 20-year funds to pension funds, with their long-term liabilities. The tradeoff: returns for illiquidity. While the money is locked up the returns compound over 20 years. “Mathematically it works quite well,” he said.

Schwarzman argued that with current levels of performance, hedge funds’ 2-and-20 fee structure is too high. “I don’t think that’s equitable,” he said.

Still, for all the rapid growth of public private equity firms like Blackstone, the stocks have sagged of late. The Blackstone chairman argued that investors are simply “wrong” about these firms, not recognizing their ability to replicate success over a long period of time. “They think it’s some magic show that’s going to end,” he said. The wonderful thing about PE is its flexibility. “Sometimes you’re better off selling; other times you’re buying,” he added. He sees the recovery continuing, with U.S. consumers in pretty good shape. With interest rates so low, other assets, like stocks, rise. “People have been talking about this [the Fed raising rates] for so long that they may do it just because they’re bored,” he said. The Fed needs to normalize rates: “Twenty-five basis points won’t make a lot of difference.”

Hanging over the market and the economy is the current state of U.S. politics. “Presidential politics is a mystery,” Schwarzman said. There’s great frustration and very little conversation about substantive policy in this election season. The danger: That people will stay home rather than vote.

Schwarzman regrets the turn to protectionism from both candidates but he also worries that technology destroys more jobs than it creates. “It creates an enormous burden.” Part of the problem is a tax system no one understands. Schwarzman argued for a flat tax system — admitting that it might alter the carried interest so central to private equity — as he has for years, and for a reduction in regulation. “We have to grow faster,” he said. “Our [Blackstone’s] success, which is substantial, is not that important for society. We have to get these things right [for society] and we’ll do even better.”

And where does he see opportunities? Characteristically, Schwarzman describes contrarian and distressed plays: real estate in post-Brexit U.K., companies in Europe, assets in Brazil. As for the U.S., the firm, he said, has seen “some interesting things still in real estate,” though prices have risen some. That may be the best economic news of the day.

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