WHEN: Today, Friday, August 4, 2023
WHERE: CNBC’s “Squawk Box”
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Blackstone Chairman, CEO & Co-Founder Steve Schwarzman and CNBC’s Becky Quick that aired on “Squawk Box” (M-F, 6AM- 9AM ET) today, Friday, August 4. Following are links to video on CNBC.com: https://www.cnbc.com/video/2023/08/04/blackstone-ceo-stephen-schwarzman-on-fitch-downgrade-the-numbers-justify-it-regrettably.html and https://www.cnbc.com/video/2023/08/04/blackstone-ceo-stephen-schwarzman-on-reaching-1-trillion-milestone-real-estate-u-s-economy.html.
The full interview will be available on “Squawk Pod” today.
All references must be sourced to CNBC.
BECKY QUICK: Private equity firm Blackstone crossed the $1 trillion mark in assets under management earlier this summer. That’s a far cry from the $400,000, the firm’s Chairman, the CEO and the co-founder Steve Schwarzman started with back in the 1980s. Taking a look at what else has been happening with this, I sat down with Schwarzman at a “Squawk Box” exclusive that covered a lot of ground. We went through artificial intelligence, we talked about politics, we talked about real estate. Also his and other Wall Street leaders thoughts on the Fitch downgraded the U.S. rating series. We started with the road to $1 trillion.
SCHWARZMAN: Well, it’s a long journey. When we started in 1985, there weren’t diversified private equity firms. Basically, there were just about seven or eight firms that just did leveraged buyouts. And when we started, we I was worried that if you just did one thing, because there are no patents in finance, we had a strategy of wanting to go into other areas as long as it was really exciting for the investors, people we could raise money from.
QUICK: So constant innovation basically changing.
SCHWARZMAN: We started to have an innovation machine. And I thought it was just necessary. And we were the only people who wanted to do that and so we got really lucky. We were good at figuring out what was next, you could sort of see it. We went into real estate in 1991, ’92 at the bottom of a real estate collapse and now we’ve become the largest real estate investor in the world. We went into hedge funds in the late 80s and that proved to be a really good thing and the debt business in 1998 before almost everybody else was doing that. And we’ve just had one thing after another and each one I look at as an individual opportunity, no grand strategy of exactly where we go, but our job was to create new products and great returns with very minimum risk.
QUICK: Steve, you mentioned that you are the largest owner of real estate and there are people who look at that and say, oh no commercial real estate in particular is a real problem spot and that’s been the area that even though a lot of issues in the financial markets have worked out, people look to that to say that’s going to be the next big problem. What do you say when people say, what do you do with this? Are you in trouble?
SCHWARZMAN: Well, the answer is it’s a great area, but not all parts of it are great. So the part that reflects what you were just asking about is in the office area. And today, 20% nationally of offices are empty because people haven’t come back to work and at that level, office buildings are no longer really viable from an equity perspective. Now the new ones really are. People want to be in those but if it’s 10 or 15 years old, then you have that problem. We have tons of office buildings at the financial crisis, 70% of what we owned. Today in the United States, we only own 2% of that problem area. The rest of what we own is where real estate is really terrific. Warehouses, for example, are about 40% of what we own. They’re going up 12 to 14% a year in rents. Hard to imagine that that’s a problem because it isn’t. There are other areas in real estate like data centers, which are literally exploding with growth. Rents are going really high. So what we find in real estate, they’re good neighborhoods, in effect, and some really not good ones and our portfolio is hugely biased to the good areas.
QUICK: When did you see the problems with commercial real estate with the office buildings and say we’ve got to get out of this?
SCHWARZMAN: It started in the late teens and we were finding that the cash flows coming off of those buildings weren’t what they used to be, the cost of running them, capital expenditures, other things and we decided that we should really lighten up and we did. We had a huge switch of we switched out of shopping centers around 2015. And so part of the art of really being terrific in the real estate business is knowing which sub asset classes to be in. So resort hotels, which we also have a bunch of, you know, I don’t know what they call it, is it revenge spending?
QUICK: Yes.
SCHWARZMAN: After the pandemic, we made a profit I think of over 10 times our money in Las Vegas with a wonderful hotel. And so if you’re consistently in the right place at the right time, real estate, which is the second biggest asset class in the world is is really wonderful place to be.
QUICK: I remember what was it a year and a half ago I think, you started talking to your businesses about the potential for a downturn and making sure that all of your companies were really kind of getting their things in order and making sure that they were ready to go if the cycle turned down, if interest rates went higher. What are you telling those companies right now, what do you see?
SCHWARZMAN: Well, we were right on all that. You know, we had a banking crisis over the last few months and being conservative, and having good financing was the way to go. The world is changing somewhat now as you know. Instead of really going into recession, U.S. growth was 2.4% in the last quarter and it shocked almost everyone. And so the U.S. economy is more resilient. But what’s really fascinating is how much inflation has gone down. And if you remember, my partner, Jon Gray goes on your show periodically. And we’ve been talking early that inflation was way more than the government was reporting. I think that was true. And then we started talking about the fact that inflation was going down much more than the government thought. And we’re seeing it in our companies. And I guess there was just reported 3% inflation that in no way surprised us. And so, it looks like the Fed is actually doing a pretty remarkable job contrary to what people might have thought and if inflation continues to go down, that we have full employment, then we may be able to skirt a recession.
QUICK: Several big investors have looked at the downgrade that Fitch gave to the United States long term debt. Kind of a — saying this is an odd time for it. Fitch did make some good points in why they were downgrading out of the things that have happened over the last two decades. What are your thoughts on the downgrade and what it means?
SCHWARZMAN: Well, nobody expected it. That’s the first. Secondly, the numbers justified regrettably, you know, we’ve had an explosion of debt since the global financial crisis and we don’t appear to have a lot of discipline going forward. We’re running huge deficits now. So on the numbers, you can understand why they did it. On the other hand, as Jamie said, because Jamie’s always opinionated I must say, you know, the U.S. is the U.S. We are the reserve currency. We do defend a large part of the world including people who have triple As and when there’s a crisis in the world, they buy our securities. Now that doesn’t last forever if you don’t keep some discipline. And so in a way, it’s a bit of a shot across the bow. On the other hand, people forget it’s actually a split rating. Moody’s and Standard Reports have historically have been two major agencies. One is AAA. One is AA+. I agree it’s not going to make a huge difference in really any way for the debt markets. But it is a little shocking when somebody just wakes up and says, I’m not so enthusiastic about your system.
QUICK: You’ve been a big donor to politics over the years since we’re talking Washington now why don’t we jump into that. You had said after the 2022 midterm elections, that you thought it was time for new leadership. And I guess you’re referring to President, former President Trump, President Biden, think they’re getting a little bit older. Have you made any decisions about who you’re backing for this next election?
SCHWARZMAN: Oh I’m sort of watching the thing with fascination. You know, as, as I said, I think it’s time for a new generation of people to take that slot. It’s not the easiest job in the world. We all watch this and the demands on people in that position are frankly unbelievable and I think you need a certain amount of resiliency and when you’re approaching your 80s, I’m not sure that that’s the exact kind of position to be in to have those demands made on you. In terms of myself, I’m just watching the whole thing because it’s it’s like a, it’s like a really amazing thing. I mean, you have a, I guess it was somewhere around 60, 65% of Americans don’t want the President to run and 55% or so that don’t want the former president to run. Something’s going to happen here. And unbelievably, if you look at where we were 2015 at this time for the national election, the number one person was Scott Walker. The number two was Jeb Bush talking on the Republican side. And then number three was Rudy Giuliani. And I think by the end of the second primary, they were all gone and so we’re way ahead of a presidential election, year and a quarter and my observation in America is pretty volatile. And you never quite know exactly what’s going to happen except there’s always a lot of drama.
QUICK: A lot of drama for sure and I think we have more of that to come. Steve, back in February of 2019, I got to go with you to MIT where you made a huge donation for artificial intelligence and really beefing things up because you were concerned about what China was doing with artificial intelligence and the potential for the United States to fall behind. You wanted to make sure that we didn’t do that. Where are we in this race right now? And what do you think of all the developments in AI this year?
SCHWARZMAN: Well, what I’d say to start is that the call on focusing on artificial intelligence, you know, starting myself in 2015 and doing that large MIT donation to start their new College of Computing and doing something allied to that with ethics in AI at Oxford turned out to be the right calls because that’s what’s on everybody’s mind now. What I’d say with AI, this is one of the most exciting developments of a lifetime and AI isn’t going to just be able to write poems for somebody’s birthday, it’s gonna be part of everyone’s life. It’s going to change the way organizations run. It’s gonna result in an explosion of discoveries in medical science and drugs. It’s going to change how education is done, it can be customized and basically be done around the world. It’s going to change the profitability of certain companies. At Blackstone, you know, we’re just totally focused on this. We have a data science department of 50 people. We have 250 portfolio companies, I just had a meeting with 100 largest and made it clear to everybody that, you know, this is a first mover advantage kind of technology where if we get there first with our companies then they’ll be much better positioned than somebody who shows up five years later. And what’s interesting to me now is the major companies in this field, Microsoft, Google, others are all not only cooperating with the U.S. government, they’re pushing regulation because they really don’t want bad things to happen with the rapid introduction of the technology. I think what’s going to happen is you’ll ultimately have some type of global regulation, something like a supranational institution that can audit what people are doing. Think about an analogy of whether it’s the World Trade Organization or World Health Organization, but with more of a financial and auditing function to make sure that what people are developing really is safe.
QUICK: Will China try and flout the rules as they’ve done with the World Health Organization, the WTO to this point, or do you think they’ll come into line too?
SCHWARZMAN: Well, it’s hard to know one the West and China now have such a complex relationship, that it’s difficult to predict. What I’d say is that the Chinese are very concerned about this type of technology because they don’t have an open society the way we do. So they’re already trying to control this and, you know, there may be an opportunity to have the world operate together on this because you don’t want adverse things that could happen to happen. That that may be a bit of a Pollyanna view. But it’s an important thing to get this right.
QUICK: You can check out the “Squawk Pod” for the full interview with Steve Schwarzman. That will be on your feed today.
