‘One person’s pessimism is another person’s opportunity’: Inside Blackstone’s $500 billion bet on Europe ...Middle East

Blackstone CEO and co-founder Steve Schwarzman would have a strong case to be in a circumspect mood as he visits the company’s European headquarters in London.

In addition to celebrating Blackstone’s 25th anniversary of European operations this week, the 78-year-old Schwarzman is on the cusp of tipping Warren Buffett to the mantle of the longest-running, still-serving Fortune 500 CEO, once the Berkshire Hathaway boss steps down at the end of the year.

Scharzman’s response to a question about his thoughts on his legacy, though, was to quickly brush it aside: “I don’t think about legacy,” he told Fortune in London.

“I think about what our opportunities are and what we can build, and that’s the way I’ve always thought.”

It was a fitting, then, that Schwarzman rang in the anniversary by revealing last week that Blackstone intended to invest at least $500 billion in assets across Europe over the next 10 years.

Blackstone’s latest pledge represents a significant ramp-up in the company’s European operations, adding to the current $300 billion worth of assets built over the last 25 years. 

“The fact that Europe hasn’t been as creative in terms of new products and other types of innovations is, frankly, great for us.”

The group has steadily amassed a portfolio of property assets, data centers, leisure facilities, and logistics centers in a bid to capitalize on the country’s lagging infrastructure push this century, with government support weighed down by the global financial crisis and ensuing austerity policies.

“The fact that Europe hasn’t been as creative in terms of new products and other types of innovations is, frankly, great for us,” said Schwarzman.

“It’s a very large economy, and it’s got a lot of friction, and that’s often when you could make very good investments.”

Europe’s opportunity

Blackstone, for the last 25 years in Europe, has made hay while most of the region’s economies struggled with low growth. The U.S.-originating company has been able to use its vast swathes of capital to buy up real estate assets below their value and develop them to make sizeable profits. 

When it first moved in on Europe, Blackstone identified historic, unloved assets that could quickly build value, with a $850 million deal to buy the historic Savoy hotel its first major U.K. investment. 

Blackstone bought the short-break holiday chain Centre Parcs in 2006, before selling it for reportedly double the value in 2015. Alongside the Lego founding family, Blackstone took the Merlin Group, which runs attractions like Madame Tussauds, the London Eye, and Legoland, private in 2019. Blackstone had previously grown the group from an initial value of £100 million to £5 billion when it listed on the London Stock Exchange in 2013. The group has since pivoted to identifying high-growth sectors that outshine Europe’s average underlying GDP growth numbers. Blackstone is emboldened by recent developments on both sides of the Atlantic.

“In the last couple of months, Europe has sent some of the most positive signals we’ve seen in a long time,” says Lionel Assant, Blackstone’s co-chief investment officer and European head of private equity. He cites Germany’s relaxation of its fiscal rules to allow a $1 trillion-plus investment drive to bump up its defense industry and wider infrastructure.

“Right neighborhood, right price, right intervention.”

The U.K., which Blackstone’s president and COO, Jon Gray, also praised under the Labour government, got kudos from Assant for its attempts to rebuild ties with the EU after Brexit. 

While Gray expects the U.S. to continue to grow faster than any developed market, he says the uncertainty caused by the Trump administration is playing into the European investment proposition.

Assant says Blackstone’s investments need to abide by three cardinal rules: “Right neighborhood, right price, right intervention.” In Europe, where growth has been lower than the U.S. and Europe, those rules are even more important, according to Assant. 

Assant says the group has identified logistics centers closer to cities, betting that online shopping is only likely to increase and customers will pay to get their goods quicker. Electricity providers and data centers have also become more crucial with the growth of AI: “It takes way more electricity if you use ChatGPT than if you use Google,” Assant uses as an example. 

“Europe has had a tough run, and there has been, I think, a feeling from a lot of investors, like, ‘Oh, I don’t want to invest in Europe.’ And I think it’s nice to say no, Europe matters, the U.K. matters, London matters,” said Gray.

Europe’s quirks

The bane of many in Europe has been the continent’s relatively weak public markets. More than 96% of the region’s $100 million-plus revenue companies are private, according to analysis by Apollo Global Management. By comparison, the group calculates the U.S. share at 87%. Blackstone puts the figure at around 90% for Europe.

Some of Europe’s biggest financial players, including EQT, have called for an overhaul of public markets to improve liquidity and inspire more risk and investment. 

For Blackstone, though, that phenomenon has proved a goldmine. 

“If you don’t have access to these businesses, then you’re missing 90% of the market,” said Assant. “I would say it’s probably not very prudent. It means you’re not very diversified.” The company has taken private several European firms, like Merlin, removing them from the scrutiny of quarterly reports and pressure for immediate returns on investment.

“What matters is a starting point and the end point, and because these two points are five to 10 years apart, we can take the time to make the right decisions and the right investment,” said Assant.

As a private equity and real estate company in Europe, Blackstone has faced inevitable skepticism. 

Gray describes how the movie Pretty Woman had played a part in perceptions of private equity globally. In that movie, released in 1990, Richard Gere’s character specializes in buying up distressed, long-running businesses and stripping them for parts. 

The Blackstone president says the comparison “frustrates” him: “When we first showed up to buy the Savoy, if you went back, it was a little bit of, ‘Oh my gosh, the American vultures are here.’”

It’s different now, he says, as Blackstone focuses on buying assets that have the potential to improve in value. “The emphasis on cost takeout is really not what it’s about. It’s really about growth.” That the company has consistently grown its European assets in the face of the global financial crash, the sovereign debt crisis, and Brexit is testament to that mantra.

Blackstone is particularly fond of its work on places like the Savoy and Claridge’s. The King of Greece, a frequent patron of the latter before and after Blackstone’s involvement, sent Schwarzman a personal letter of thanks for the company’s restoration of Claridge’s.

Still, Blackstone has felt the firm hand of local regulations on some of its value-building endeavors. Housing has been a sensitive matter. Denmark intervened to regulate how much Blackstone and other large private investors could hike rents after renovations. The group faced similar obstacles in Spain. Blackstone has also faced accusations of contributing to gentrification through its strategy of renovating properties before increasing their price. The company has refuted those claims, arguing it has contributed to increased housing supply in Europe.

“That’s the segment where the bar is highest, in terms of making sure we get things as right as we possibly can,” said James Seppälä, Blackstone’s head of European real estate about his unit’s residential assets. “We need to be acutely conscious of that and we need to do the very best jobs we can in that context,” he said, while admitting the company sometimes makes mistakes.

The group has since focused on putting capital towards increasing the supply of housing, and has built up a portfolio of affordable housing and shared ownership units across the U.K., becoming the largest provider of affordable homes in England for the past four years. Last year, Blackstone sold £405 million ($548 million) worth of U.K. homes it had helped build to the USS pension fund.

Blackstone’s people

As he approaches 40 years at the helm of the company he co-founded, CEO Schwarzman is naturally a fountain of knowledge on recruiting. Blackstone now has around 800 employees across Europe and the Middle East, with more than 650 of them based in London. A new headquarters is under construction in the affluent Berkeley Square in Mayfair.

“It usually starts out with an American landing on the beach, putting together a team,” Shwarzman said of how he has built a Blackstone culture in Europe over this century.

Each Blackstone employee, Schwarzman says, has the same traits.

“First, they’re very nice people. Secondly, they’re quite smart. Third, they’re extremely hardworking. Fourth, they have the will to win. Fifth, they don’t sleep much. And sixth, they’re working in a place that’s a meritocracy, that’s designed for each of their individual successes.” That final point is reflective of an arguably European mindset and was informed by Schwarzman’s time in the cutthroat culture of Lehman Brothers. 

Even as Europe locks in for a new era of growth, Schwarzman is confident it will continue to take advantage of the region’s historic pessimism to unlock value.

“One person’s pessimism is another person’s opportunity,” said Schwarzman. “And so that’s one reason we like Europe. 

“Europeans become somewhat more pessimistic, certainly than Americans. And from time to time, that’s inappropriate.” 

This story was originally featured on Fortune.com

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