by | 01, Jun 2022

Book Deep-Dive: King Of Capital

The ’80s were a crazy time. Lots of change, evolution, and capital!

Remember, with each episode, we will provide a helpful Deep-Dive infographic where we break down the entire book on to 1 page! Check out, and download, this week’s infographic below!

David Carey and John E. Morris breakdown how Blackstone and other private equity firms in the 80s transformed from vicious gamblers to risk-averse artists in the industry. With the banks and the financial establishment take on said risk, driving the economy into the ground. Now with over 880 billion dollars in assets under management, Blackstone is one of the leading investment firms in the world. King of Capital shows how Blackstone and private equity will drive the economy and provide a model for how financing will work in the years to come.

Here are our top 10 takeaways:

  1. The 80s
  2. Shared Philosophy
  3. The Next Big Fund
  4. Right Person In Charge
  5. Starter Office
  6. Financial Engineering
  7. Crickets At Launch
  8. Fee Income
  9. What You Do Well
Download the infographic here!

Tweetable Quotes:

“Blackstone is probably the biggest company in the world that you’ve never heard of.”  – Anthony Vicino

“You find something that people need and you then provide it at scale.”  – Dan Krueger

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five rules of investing

The Five Rules of Investing

** Transcripts

King of Cap

[00:00:00] Dan: hello and welcome to

[00:00:14] Anthony: multi-family. Investing made simple to podcast. That’s all about taking the complexity out of real estate investing so that you can take action today. I’m your host, Anthony of Invictus capital joined as always by Dan. He doesn’t know who wins the Johnny Devers. Amber heard trial Krueger.

Does anybody, is it over? We’re recording it right now while the jury’s deliberating. So right now at this moment in time, Dan and I, nobody in the world knows, but by the time that you, dear listener are listening to this episode, there’s a high probability that, you know, the answer to this wins, get over to the comments and leave a review at iTunes and tell us who wins.

And what do you think about that? Um, I’m pretty sure I can’t wait for this to be over so I can get my.

[00:00:55] Dan: I mean, it’s really entertaining. I mean, they could really only go one way. Right? I mean, it’s

[00:00:59] Anthony: like, I mean, [00:01:00] I will lose the entire, all my faith in humanity if it goes the other way, but then again, OJ, OJ got off.

[00:01:06] Dan: If it doesn’t fit, you must,

[00:01:07] Anthony: as the club don’t fit, you gotta quit. Um, there was nothing nearly as catchy as that in this trial, but all right. What are we doing here today? Dan? We’re

[00:01:15] Dan: going to do a book read. Yeah, little king capital. Yeah,

[00:01:19] Anthony: it’s on the floor. Yeah. Who’s cause I forgot who here it is. It’s on the table people.

So if you’re want to watch this at home, go over to YouTube. To multi-family investing made simple. We got a book on the table. You can see our faces as we talk. It’s great. Um, if you just like our voices, Kingston,

[00:01:33] Dan: capita. The remarkable rise and fall and rise and rise again of Stephen Schwarzman and Blackstone written by David Carey and John Ian Morris.

Now, if you don’t know

[00:01:42] Anthony: who Blackstone is, it’s probably like it’s probably the biggest company in the world that you’ve never heard of. Um, been be the biggest company in the world. They own everything. The big private equity firm. This book is actually really interesting because it walks through private equity and the evolution of it over the last 40 ish years.

And we take it for [00:02:00] granted these days that private equity is such, such a ubiquitous part of investing and business life cycles. But there was a time when there really wasn’t such a thing as, you know, private equity, as we know it now with firms going out there with the idea of buying businesses, adding value, or stripping them down to their components and then selling them.

And it’s a fantastic read.

[00:02:23] Dan: Yeah. Yeah. And also I think one of the things was like coming out of the eighties, everyone thought that. Private equity and corporate Raiders were like the same thing. Like everyone was in private equity was a corporator and they’re all going to buy a thing and strip it down and do what you just said.

But, uh, really what little lot of these guys do like, um, Blackstone and, and, you know, some of the really great guys that are in the industry is they do what we do with apartment buildings. But with businesses, they buy them. They make.

[00:02:49] Anthony: To get a higher, multiple higher evaluation, sell it, or they just keep operating it at a higher profitability, not a bad thing.

I just, I just core private equity, I think is a really good thing. It’s [00:03:00] taking businesses that are doing great, then making them better. It’s exactly what we should be. Moving things. Excellent thing. So all this to say, it’s like this book is interesting to us because we’re not necessarily going out and buying businesses and improving them.

Um, but if you think about, uh, buildings as a little businesses, then maybe that’s exactly what we do. It is the exact same thing. All right. So. So usually when we do these book reviews, Dan and I, we each come with like five takeaways and we put them together in a beautiful visual infographic that we call the sophisticated investor notes, which if you want to get a copy of all the past ones, I think we’ve done like five or six at this point.

Shoot me an email, anthony@invictusmultifamily.com. And I will send you the link to the folder where all of those are available and will cost you nothing. But here’s the thing for this book. I actually really struggled to come up with takeaways, things that I remember. I remember the story being engaging.

I really. I didn’t come up with too many takeaways. Dan did. So we’re going to dive into Dan’s takeaways. I think he’s got about six. I got one and we’ll unpack them together. How’s that sound? Let’s

[00:03:57] Dan: let’s do it. Let’s do it. All right. Take it away. All right. [00:04:00] Number one. Uh, which one did you first? I guess the one thing that I, the one I want to start with that we did

[00:04:05] Anthony: that book review.

[00:04:07] Dan: The one thing, oh, hush, hush. The thing I want to start with is that just in general, the period of like the eighties and the nineties, I’ve read a lot of books recently about stuff that happened in this period. And this is the same period. The Blackstone came out of. It was a very active, uh, and, um, active and.

Uh, what’s the word I’m looking for changing. Give me a synonym for changing, evolving. Yes. Well, there was a lot of evolution that happened, I guess I’ll phrase it like that. A lot of things changed. And what I noticed was reading, uh, trillions, which is about the evolution of index funds. And, uh, what else have I read about this period?

Uh, there was another one too. I can’t remember. Obviously. Of course. Yeah. That was a long time ago. Of course. Yeah.

[00:04:52] Anthony: I’m sorry. Who do you think I am?

[00:04:54] Dan: Yeah, it’s been a long time actually, but, um, there was something else. I mean, there’s trillions, [00:05:00] obviously this one, there’s something else I’m blanking on, but a lot of stuff happened in that time period, which when you kind of whittle it down, what happened was some of these little private, old boy club markets, like private equity and things like that.

Got turned into something that was brought to the mainstream and a lot of wealth was created and it kind of ties nicely into something that, that Neval Robert Kahn talks a lot about where he’s like, you find something that people need and you then provide it at scale. And that’s what a lot of these guys do, whether it be index funds or private equity, they took something that was private and pretty much brought it to the masses.

And that’s the scale piece. So I just was one of the takeaways I thought about was how this, this was the value add that they brought. They took something that existed in the. Putting on steroids just made a big, um, and it was, I think important for me because I’m listening to novel will have, because I was preparing for this, a meeting that we’re going to have on his book.

And that’s kind of a consistent theme with what Novalis says is you take something that people need and you deliver it at scale. And that’s exactly what all these guys are doing in the nineties and [00:06:00] eighties.

[00:06:01] Anthony: I mean, if you look at all the businesses that Blackstone owns at this point and what their PR like their total revenue probably is, it’s probably the.

Right look across their entire portfolio. Um, they’ve, they’ve managed to bring it to the masses. We’ll say that. Alright. Yeah. What else you got? What’s number two,

[00:06:18] Dan: number two, um, is served with a lot of JVs early on.

[00:06:24] Anthony: That’s a very interesting, um, there’s a corollary there with, with real estate investing. Um, you know, a lot of people think that they can jump straight into syndication, jumped straight into like the private equity acquisition.

Um, mode, but really like JVs is where everybody, like a lot of people start out and then even as they get bigger, they go back to joint venture period where they go, like the rise, the fall, the rise again, and Stephen Schwarzman was like correlated with the JV and then bringing in massive, um, retail investors.

And then kind of getting back to more, more of the. Uh, the joint venture is like working with billion dollar wealth [00:07:00] funds and other companies, banks that can, that’s another interesting thing, actually, that the banks for these, like these acquisitions, they will do participatory loans like that whole, that whole model came from this world where there was Abe.

And you might have this actually, but I just remembered this where they were trying to get these big deals done, like billion dollar acquisitions, and the banks are like, no, we love this, but we don’t have the, we don’t have the money on hand. And one of the guys from Blackstone went off, spun this thing, and he started going to different banks and saying, Hey, let’s participate.

Bring our funds together to do this thing. That’s a whole different, yeah,

[00:07:34] Dan: that’s another one of the things I was thinking about when I was talking about the eighties and nineties, all the stuff that came out of that was with, uh, the junk bonds, right. A whole nother element of the cap sack that became used quite a bit, which is basically just high yield bonds, which is great for guys like those who don’t mind paying some higher interest to get more capital and.

Using more leverage, but between index funds junk bonds, like the, um, the more sophisticated debt structures these guys came up with. I mean, a lot of [00:08:00] stuff was, was created in this time period. And it’s, it’s pretty exciting just to kind of see all the stuff that was happening then, uh,

[00:08:07] Anthony: Yeah. Ultimately like, remember, like the name of this book is all around the rise, the fall and the rise again, like there was a fall in there.

Um, whoops. And some of it had to do with some, like some of these creative shenanigans. Um, I mean

[00:08:18] Dan: more debt is not always good. So you get too levered up and things. Uh, things aren’t too bad, but that actually kind of ties nicely into that

[00:08:27] Anthony: is like Prosecco. It’s good in modern. Yeah, or not at

[00:08:30] Dan: all. Yeah, for a second, not at all debt moderation.

Uh, but that ties in nicely with the, one of my other takeaways was that they, they shared a lot of the similar business philosophies that we do specifically super-conservative prioritizing high cash, uh, asymmetric risk reward. Deals where a lot of their counterparts in this period, whether it was kind of a fall, um, you know, we’re, we’re getting really levered up and just doing risky, risky deals, but these guys prioritized cash and running a lean operation, which was [00:09:00] a big takeaway for me because that’s what we do.

And I was like, oh great. Blackstone does the same stuff. They the same kind of core philosophies that contributed to their success. That feels good. Yeah. It kind of gives me confirmation that we’re on the right track. Even if we’re a little bit slower out of being

[00:09:13] Anthony: conservative. There, there became this race.

It seemed like in the eighties and the nineties to have to be the one to raise the next biggest fund. So it started with like, oh, they raised the first billion dollar fund. The next guy came across in the, like the first 2 billion, 3 billion, 4 billion. And there was like this race between not just Blackstone.

What’s it like KKR, um, these other private equity firms to kind of keep one-upping one another and ever increasing bids to have like the biggest deployment of funds. And it kind of came to a head with the barbarians, the gate, the whole RJR Nabisco takeover, where it’s like paying incredible, incredible multiples, almost simply for the sake of being able to say, look how much we paid for the thing, even though it wasn’t really tied to the underlying performance of the asset [00:10:00] in that.

It can be really tempting given, given where we’re at right now in the market cycle to be like nobody ever goes into buying a building, thinking like, I want to be the one who pays the most for it, but people definitely like bragging after the fact and being like, oh yeah, we just had a $50 million acquisition without really unpacking.

Okay. But was the acquisition only worth 40? It’s nice to be able to say we did 50 million, right? Like,

[00:10:22] Dan: yeah, RJR. I think a lot of that was driven by just, uh, the fees, uh, and specifically, uh, packages for, um, I forgot his name. Um, who’s the, uh, the president CEO of RJR Nabisco. I don’t remember. Yeah, I forgot his name, but I mean, the, the package that guy walked away with who are the parents of God, like that’s, what was the incentive like?

Who cares? How much we pay for the company, my bonus for this transaction. I mean, it’s huge. I mean, that’s millions, hundreds of millions of millions in the nineties. I think

[00:10:54] Anthony: it was bonkers. And it’s the same thing again, with syndication with real estate and operators is, uh, [00:11:00] making sure that the, the, the incentives, the fiscal alignment is there.

And I think that’s something, um, one of the really cool takeaways I do recall from this book is that. One of Schwartzman’s management growth techniques is to find somebody brilliant. Who’s really competent, great at the thing, put them into the seat and start like spin off an entire new division and Newt company, give them equity in it and be like, go build it.

Like that’s where BlackRock came from, which is like, they’ve now spun off. But BlackRock was a subsidiary of Blackstone. And now BlackRock is like the largest owner of real estate. Like that was the focus, the guy that was like, I’m great at real estate. Focus on that and put brilliant people into the seat and let them go.

[00:11:41] Dan: Yeah, I think they’re, uh, they’re bigger now, right? Blackstone.

[00:11:44] Anthony: Blackened is BlackRock, blueberries and Blackstone.

[00:11:46] Dan: Yeah. I think BlackRock is going to be surprising and don’t quote me on that.

[00:11:50] Anthony: It’s really hard. I think at a certain point with a company like Blackstone, cause you don’t even know necessarily what all they got their fingers into.

Yeah. In a lot of ways. Yeah. I mean, you can figure it out. [00:12:00] Why don’t we

[00:12:00] Dan: take a lot of it’s private markets. So it’s like some of it’s. How do you, how do you value that stuff? Yep. Um, let’s see. Another one. Um, this one’s kind of fun. You’ll appreciate this, Anthony. Uh, they started the first office was 3064 square feet.

How big of ours?

[00:12:16] Anthony: It’s gotta be way long, smaller, just,

[00:12:20] Dan: just, no, no, we’re bigger than that. I think we were around 2000, just shy. I mean, if you count the storage, it’s not all functional, but the footprint of the unit, big arches people, uh, I mean, it’s a work load. It’s yeah. Anyways, so I mean, you can run a lean operation, I guess, which is basically what I’m trying to get out.

They ran a lean operation. They grew to a very big size with very small head count, very small footprint. They didn’t go get the big grandiose office. They kept it lean and they focused on growth, which I think aligns really well with us. It makes me feel better about. Keeping it a conservative. Yeah, no,

[00:12:55] Anthony: I like that.

And also part of their acquisition strategy, or I think it’s really [00:13:00] telling why they succeeded in a lot of cases. They were only looking at deals that they knew they could go in there and actually improve complete tangent to the office space, which is very good. But it’s also coming to me that one of the things that they were really good at is staying in the lane and evaluating opportunities through the lens of, can we.

Actually improve this, not, not just saying, is there improvement to be had, but actually asking, can we do it? Yeah. Because a lot of times, like you can see opportunity to be like, oh yeah, it’s just so simple. You could go and doing this and this and this and the other thing, but really like, you don’t have the core competency or the skill to go do it.

So it’s one thing to recognize what needs to be done in another to actually be able to go do it. And they were really good at saying like recognized opportunities and couple it with the capacity to go.

[00:13:48] Dan: Yeah, that’s, what’s interesting about the private equity model compared to ours is like the, the mechanics of what’s happening is almost exactly the same, except instead of buying businesses, we buy properties, but we’re effectively doing the same thing over and over [00:14:00] again.

And there’s obviously private equity groups that focus on. Uh, market, same type of business. But with guys like this and KKR, KKR, I mean, they’ll have a really diverse portfolio of different businesses. So almost every deal is going to be a completely different animal and they’ve got to bring in all these different experts.

So it’s this, isn’t a takeaway from the book. It’s just kind of an observation of private equity in general. It’s infinitely more complex, I think, than what we do because each business is its own little animal, but apartment buildings are pretty similar. They’re they’re um, they have their own nuances, but it’s, um, it’s comfortable kind of going into.

Multiple apartment buildings. Whereas for doing businesses, I feel it could be a whole different can of worms each time. One

[00:14:36] Anthony: thing that does stand out to me though, with private equity firms and like reading this book is that, um, one of the ways that these guys are really smart, like they’re really brilliant.

Way smarter than we are for sure. Like, we’re just done real estate investors going by buildings. It’s really simple, but one of the ways that they would go and add so much value is through financial engineering, which is probably one great way to add value to any [00:15:00] business is really understanding how to manage the cash flows, receivables, payables, all that stuff, all that jazz.

Yeah. Engineer in a way that can maximize profitability. Now with that said, you can also overly engineer a thing, which I think got into the fall part of the equation is like at some point, um, too much engineering is now manipulation and becoming very detrimental potentially.

[00:15:24] Dan: Yeah. I mean the more complex things get the harder it is to figure out where all the potential pitfalls and landmines are.

That’s why we like basic simple things. Uh, Usually pretty accurately quantify with the downside is, but if you get something that’s, you know, exotic and then, you know, rocket science of the finance world, where like you need an engineer to tell you what the heck’s going on. Um, there’s probably a lot of things that could go wrong.

If you,

[00:15:47] Anthony: if you’re sitting in a meeting and you need to bring in like PhDs to explain the finances and stuff to you, I’m like that’s too much for me. I don’t want any part of that.

[00:15:55] Dan: Thank you. But no thanks. No thanks. It’s good for somebody out there. Not me. [00:16:00] Uh, let’s see what else we got here. Um, There were a lot of crickets at the launch at the launch, but the first fundraise there were crickets.

Um, these guys came out of Lehman brothers, I think good network, uh, of, of people and of investors. They came out confident when they launched their fund and they were going to send out all these, I was gonna say emails, but probably letters. Um, they sent out all these letters to everybody and said, Hey, we’re launching this great fond, you know, us, we’ve done a bunch of business and Lehman brothers is going to be amazing and.

[00:16:31] Anthony: I mean, they ended up raising a lot. Context is interesting here, right? When we say like, they struggled, like they were raising large sums of money and

[00:16:39] Dan: he actually wasn’t that big on the first one. I mean, obviously this was a long time ago, but yeah, for late in Blackstone numbers that’s


[00:16:46] Anthony: there’s, there’s two takeaways here.

One is everybody struggles on their first and probably second, probably a second raising capital’s heart, but. From even the beginning, their level of success and failure was just a D [00:17:00] was just different. Their expectations were,

[00:17:02] Dan: yeah, they came from Lehman brothers. So they’re already on wall street.

[00:17:05] Anthony: This was before Lehman brothers became the Lehman brothers.

It was getting that as we know it now,

[00:17:10] Dan: now I know there’s no Dick fold yet, but it was, and he

[00:17:13] Anthony: was moving that truck back. We talk about parachute, uh, golden parachutes. What did he get? I don’t remember not gelatin. That’s what he deserves. No one guy like one person. Yeah,

[00:17:27] Dan: one, one poster child. Um, there’s there’s another one I pulled out after

[00:17:32] Anthony: his name out of a hat.

They’re like, all right, I’m going to jail. Yeah.

[00:17:35] Dan: It’s a Doug. Doug. Yeah. You’re the scapegoat, right? Doug’s first day too. All right. Last one. This, this was kind of in the maybe pile. But, uh, where’d it go? Oh yeah. There’s a lot of fee income that generated, uh, the income needed for growth early on. Uh, this one kind of hit close to home because, uh, we’re at a very similar stage in our growth.

And, [00:18:00] you know, we’re kind of looking at like, how can we. Our deal is the best and easiest for investors. And, you know, we look at the fees and things like that, and sometimes there’s pushback on it and people think that, oh, you guys don’t need to charge fees and be creative. You just make your money off the real estate.

But we actually do need to pay for our overhead early on in a business. You’ve got to generate some kind of cashflow to pay for all the things to get the business going. And that’s where the fees come in. But, um, they did a lot of consulting work, which was interesting. Um, interesting. Uh, it makes sense.

They did a lot of merger and acquisition consulting. So high ticket, very expensive, very low overhead, uh, to generate fees. Obviously it wasn’t, long-term what they wanted to be doing. They want to be doing deals, but they needed a cash to pay the rent, pay the people and do all the things. And so, uh, you know, they, they charged a lot of fees and it wasn’t from a place of greed.

Um, so I guess my takeaway here was don’t feel bad about charging fees. You need the fees to pay for the overhead, to grow the business, to provide more opportunities. So that was my takeaway from the whole. Yeah,

[00:18:56] Anthony: I don’t feel bad about these. I think these are just they’re necessary if you want to invest [00:19:00] with the best companies and they need to have the cash flows, to be able to reinvest into the growth and to like the system, the processes, the people, all that stuff, and it cost money.

And you don’t want to invest into a company whose only payday is once every five years. Right? Like you want them to have strong cashflow position in the interim because it’s, if something happens. And in that gap between the five years then there they’re done the investment’s done. And so that’s not good for anybody.

It’s not good for anybody. Um, and we’d go deeper into the fees, but here’s, here’s my, here’s my one takeaway that I had written down and. Yes. It says, focus on what you do. Well, there will always be other opportunities and people may very well capitalize on them. It doesn’t mean you will. And it goes back to what I was saying before about recognizing like, there might be an opportunity in front of you, but you might not be the one that can actually go capitalize on it case in point, when we over the last year we’ve been looking at development.

We can see that there’s opportunity there, but we’re not really the right ones to go capitalize on it because we don’t have the skills, the competency, the experience, any [00:20:00] of the things really that would help us go and then, um, execute excellently. Whereas when we see a multifamily deal, it’s like, yeah, we know exactly what to do.

The confidence is high. So we can go to our investors with, you know, um, a high degree of certainty. Like when we say this is what’s going to happen, this is likely what’s going to happen. Just because we have a track record. I have experienced there. It’s just another vote for staying in your lane, I guess, which is interesting because Blackstone as they’re, so they’re in so many different lanes, but at its core, I think they did a good job of staying in the lane of always recognizing where you can add value.

And don’t go into the pool of, I don’t know why a pool, but don’t go into any pools where you don’t think that you can add value.

[00:20:47] Dan: Yeah. I mean, I really see a pool that I think I can. I’m not really a pool

[00:20:50] Anthony: guy. I don’t go into any pools where all you see is 20

[00:20:53] Dan: points at all. Um, avoid post pools.

[00:20:58] Anthony: I stayed in most pools [00:21:00] because people key in them.

I know what I do in pool. Like when I was young, I know. Yep. I know. I know you don’t need the detail. You know, you know what happens in a pool? You guys know, unless you have your own pool, don’t go in a pool. Please do it for me. Stand up. And that’s all I got. I don’t know where to

[00:21:21] Dan: go with that one. Yeah.

Stay out of the pool.

[00:21:25] Anthony: That’s my big takeaway from this book, king of capital stack out of the pool. Um, I couldn’t even read the book. Yeah, you doing? Um, I don’t know if that, that was my one takeaway it’s

[00:21:39] Dan: chapter. I think you read the wrong shoot. Oh, check it out. It’s good. Um, So we go,

[00:21:46] Anthony: is it? Oh wait. No, no, no.

Oh yeah. I read the wrong pool book. I thought it was. Kat pool.

[00:21:53] Dan: Sorry, we should have

[00:21:54] Anthony: ended this already. We’ve got to go people because we’ve obviously had getting worse and we’ve got the point of no return. We [00:22:00] appreciate you. Uh, if you haven’t already do, do do, please go leave a review. I know I say this every single episode and you’d probably tuned me out.

You probably have already turned me off at this point, but if you’re still listening to this and you haven’t left a review seriously, it makes a huge difference to Reid’s livelihood. Seriously. He only gets, he gets paid per review. He’s getting paid and we haven’t been paid for. You have this help, this guy really hungry.

He’s hungry. Help him out. So we’ll leave a review feed, read, hashtag feed, read t-shirts and we’ll see you in the next episode.

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