A Lecture on the Financial Markets by Stephen Schwarzman Finance and Development September 23, 2015 Stephany Song

Profile of Schwarzman Graduate of Yale and Harvard Business School Worked at DLJ and Lehman Brothers Co-founder and CEO of the Blackstone Group Blackstone was founded in 1985 and is a private equity firm

What is private equity? An asset class made up of equity securities and debt in companies that are not publicly traded on a stock exchange Individuals and firms invest directly into private firms or perform “buyouts” of public firms with plans to take these firms private Usually the investors are large institutional investors such as pension funds Blackstone Group and Kohlberg Kravis Roberts are two of the biggest private equity firms

What does a private equity firm do? It manages alternative assets It raises capital (money) to add value to a target company through new product development, restructuring of operations, management They generate high returns by “cashing in on investor demand for riskier investments” (INYT)

The Process Blackstone buys a company It borrows money to buy this company It takes on $3 USD of debt to every $1 USD It improves the company through managerial actions, for example The company grows; Blackstone helps accelerate its growth The company and Blackstone receive a high return on their investment

High Returns Blackstone has enjoyed very high returns on their private equity when compared to the stock markets and the institutional banks Blackstone’s return has been 23% a year for the last 20 years while the stock market return has been about 11% Blackstone’s real estate business has had even higher returns – 30% a year

Private Equity according to Schwarzman It’s great – why isn’t everyone on it? High returns on private equity is not mere luck One year after a recession is a good time to buy companies Private equity is an enduring asset class

Subprime Mortgage Crisis In the late 1990’s the US government passed a law that would help low- income people buy homes A huge number of people “bought” homes by putting zero money down and they didn’t have to pay interest for 2 – 3 years After the zero interest period, these homeowners were not able to pay their mortgages ≈

Recession of 2008 Some implications of a recession o Affects outcomes of presidential elections o Foreclosed homes o Country becomes more protectionist o This results in others (outside the US for example) investing less in the US o Affects the overall economy of the country and the global economy

Terms and Definitions What is return on private equity? What are leveraged buyouts? What is carried interest?

Criticisms on private equity Carried interest rate of 4.3%, which is miniscule when compared to the tax rate of standard corporate profits Can private equities keep up this high performance? Pricey fee structure and perhaps hidden fees? (Blackstone is currently being investigated by the SEC)

Just for Fun Scenario – o You are a private equity firm. o Your investment opportunity is a run-down yoga studio in Mapo, Seoul. They also have two other locations, one in Sinchon and one in Kimpo. The three locations are valued at 1.2 million dollars. o They are in the red each month. What business steps would you take to turn this company around? What would be your return and how long would it take?

Sources Used YouTube (lecture) International New York Times Investopedia.com