It’s a milestone year for the Blackstone Group Inc. (NYSE: BX), which transitioned from a publicly-traded partnership to a corporation on July 1. Most recently, the New York firm announced on Sept. 11 the final close of its latest global real estate fund. With $20.5 billion of total capital commitments, Blackstone Real Estate Partners IX is the largest real estate fund ever raised. Mergers & Acquisitions spoke with Stephen A. Schwarzman, the firm’s co-founder, chairman and CEO, on the occasion of his new book, What It Takes: Lessons in the Pursuit of Excellence, published by Avid Reader Press/Simon & Schuster, and released on Sept. 17. Schwarzman, who is speaking at the Economic Club of New York on Sept. 18, shared his perspective on the private equity model, its resilience during recessions and how the industry has evolved over three decades.

What do you like about the private equity model?
You have complete control of a company, rather than buying liquid stock in it. You also have time before you buy the business to appropriately study it so you can come up with a plan to accelerate its growth and grow it aggressively and productively. And you do that without the accountability that comes with quarterly earnings and the visibility of a public stock. You set a strategic plan of how you want to take this asset, this business, and turn it into something much better than the day you buy it.

The model allows for greater compensation for managers than in a public company. If you pay people more money, you can get a more qualified person. You can get extremely capable people to work with you on the strategic plan and operate the business. And you take away the time dimension for performance and invest to achieve an outcome, whether it takes three years, five years, seven years to transform the business. And you can leverage it higher than a public company. And you have a different type of board of directors for each company. They tend to be very experienced in that industry and have greater engagement and a specific knowledge base than a typical public company board.

What’s your forecast for the economy?
The economy, locally in the U.S., is slowing, manufacturing in particular. The consumer economy in the U.S. is still growing very well, and there’s full employment. Typically, you don’t have a recession with full employment and wages going up faster than inflation. If people who are employed are making more money, they’ll typically spend more money. And that’s about 72 percent of the economy. If that’s going well, the danger of imminent recession is very low. The question is: Will anything break that confidence? There’s some uncertainty, for example in trade issues, but if they get resolved, that will take the pressure off. I don’t see any type of imminent recession.

What would happen to private equity in a recession?
The same thing that always happens in a recession: Earnings go down; the prices of assets you’re buying go down; the number of realizations goes down; the amount of reported profit goes down. Historically, the cost of money goes down, although this time, it’s so low already, it probably won’t happen.

Nothing is recession proof. A recession will affect the growth rate and overall returns, but it will affect markets as well. Historically, private equity has outperformed public markets. It’s really just a question of by how much? In a recession, it’s less.

Private equity made it through the financial crises of last 40 years without imperiling limited partner capital.

How has private equity changed over the years?
When I was working as an M&A advisor at Lehman Bros. in the early 1980's, I worked with PE firms, and there were very few of them. There was KKR and Forstmann, Little, maybe about 10 PE firms. Since then, there has been an explosion. Private equity has been an enormous growth business and has drawn a lot of people to it. It was U.S. only, now it’s global. The change has been phenomenal. Now it’s a mainstream investment class.

In the beginning, the multiples were very low. You could buy companies at 5x-6x cash flow. That’s now gone up to 11x-12x, and even higher for technology types of assets. When you were buying things so cheaply, you didn’t have to add much value at all. You left things pretty much the way they were and did cost cutting to increase profitability.

This idea of adding value occurred as prices started increasing. If you pay a premium, you can’t make money unless you help the business grow in a profound way. Private equity has turned much more into a growth business, an improvement business, as much more capital has been put into companies. And private equity has evolved into a job creator as an industry.

How has Blackstone evolved?
When we raised our first fund, when somebody committed $10 million, I thought it was the most wonderful thing that had ever happened in my entire life, and I still remember every one of them. Now, we get a commitment of $1 billion. Now, firm-wide we have $545 billion in assets under management. In the beginning, 16 out of 17 investors would turn us down. Capital raising for successful firms has become much easier, because the returns are favorable, compared with public markets.

Being multi-asset-class part of our business plan when we announced the firm. Private equity was great, but we knew it wasn’t the only thing you should be doing. There were other asset classes that could also provide terrific returns and, in some cases, with less perceived risk, such as real estate, which we went into in 1991. Now it’s our largest business, bigger than PE. And we went into other specialties. We started with one fund, a private equity fund, in 1987. Now we have 50 funds, some of which are PE, but most aren’t. Now we’re multi-asset-class. Except, the way we look at it, it’s all the same things, the same assessments of risk, improving assets, improving the value of operating entities, and lending money to companies that do well in the leveraged credit area. We were the only firm doing that the, but now, most of the larger firms, and some of the medium-size firms, have gone to multi-asset-class.