PRIVATELY SPEAKING

Hamilton ‘Tony’ James is the day-to-day leader of what has now become one of Wall Street's most powerful and admired firms – Blackstone. His tenure as president and COO of Stephen Schwarzman's creation is not the first time he has dramatically upsized a private equity operation. As head of DLJ Merchant Banking, James presided over one of the dominant private equity business of the 1990s with loyal personnel across the US, Europe and Asia. He is now duplicating that success at Blackstone, but on a much larger scale. James met recently with David Snow for a conversation about where Blackstone is today and where he intends to steer it in the coming years.

HAMILTON ‘TONY’ JAMES IN BRIEF

Role: President, chief operating officer, The Blackstone
Group
Age: 57
Joined Blackstone: 2002
Joined Blackstone: 2002
Prior career: 2000-2002 chairman, global investment banking and private equity, Credit Suisse; 1995-2000 chairman, Donaldson, Lufkin & Jenrette Banking Group; 1985 founded DLJ Merchant Banking; 1982 joined DLJ
Education: 1975 Harvard Business School (high distinction, Baker Scholar); 1973 Harvard College (magna cum laude, John Harvard Scholar)

RESOURCES AND ‘GATING’
As Blackstone's “power-alleys” have grown in assets under management, James has scaled the operation accordingly. Most recently, his attention has been focused on bringing operating talent in-house to work with the private equity platform's more than 40 different portfolio companies. The Portfolio Management Group currently has 21 senior executives, and its continued growth will “be a function of the size of our portfolio. It definitely plays a much more active role now than it did five years ago at a given portfolio size. We have lean manufacturing experts, pricing experts, other specialists and they're based in the US, Europe and Asia. That's an area of active hiring for us.”

James adds that whereas “private equity teams have a tendency to boil the ocean, we focus very heavily on the key elements that the decision will turn on. What we try to do is get our people to spend more time on the critical variables. It's more efficient but it also gets us better answers.”

As Blackstone expands in Asia, it is looking for locals to join the more established professionals in the several locations. “We're actively hiring right now in Asia, in particular in our growing operations in India, Hong Kong and Japan. And we are looking at other emerging markets.”

James notes that Blackstone is not currently engaged in “a lot of lateral hiring at experienced levels in the US and Europe – we have a very deep bench there”.

James, with his zeal for systems and processes, arrived at Blackstone in 2002 and found the process by which investment opportunities were evaluated to be wanting for further “discipline and codification”. Like Schwarzman, James also has a mania for capital preservation, which he claims can be enforced without “giving up the upside” inherent in the exit-optionality of private equity investing.

Upon joining the firm, he beefed up the investment committee, among other refinements. “We've really redesigned the whole thing over the past five years,” he says. “We deliver great consistency across time periods, deals and regions. That's one of our hallmarks.”

James describes three committees that a deal must go through in order for it to receive Blackstone capital. The initial step, called the gating committee, looks for sound businesses that Blackstone would even want to own, and then taps any in-house resources, relationships or expertise to determine if Blackstone has any competitive advantage that it can bring to the situation. James adds that whereas “private equity teams have a tendency to boil the ocean, we focus very heavily on the key elements that the decision will turn on. What we try to do is get our people to spend more time on the critical variables. It's more efficient but it also gets us better answers.”

“A lot of deals don't make it through” the gating committee, says James.

Next up are the “workshop sessions” where “we do a deep dive into the nitty gritty of the business, check to make sure we still want to forge ahead and also recalibrate the team on things that we need to know. And then we go to a full investment committee decision at the end.”

Blackstone has one global culture with regard to deal doing, says James. All new deal professionals are encouraged to sit through the three investment committees in order to internalise the house approach. New Blackstone offices around the world must mix new employees with “Blackstone people steeped in our culture,” says James. “It's not a franchise model. There are microcosms of Blackstone in India and China and wherever else around the world that we are. The work is absolutely interchangeable – the quality of the work, the depth, the analytical rigor, the form of the memos. Everything is exactly the same in Mumbai as it is in New York and London. This is one of the keys to our success over the years and it's one of the things that we focus on perpetuating.”

SECOND ACT
James speaks of his stewardship at Blackstone as something of a déjà vu, albeit on a larger scale and with what he argues is a superior business model. DLJ was (intermittently) publicly traded. DLJ Merchant Banking had offices in India and China, among other non-US locations. DLJ was the firm to beat.

“When I was running DLJ's private equity business back in the 1990s, it was at the time the largest in the world,” he says. “We had private equity operations in both India and Hong Kong. Asia is familiar ground. If anything, it's matured a lot.”

James stresses Blackstone would not have entered Asia, no matter how compelling, without first bringing on board local chiefs Akhil Gupta for India and Antony Leung for China. “We're not a firm that says, ‘Oh yeah, we should be in China. Let's go. If we can't get great people let's just get the best that we can find,’” he says.

Functioning in the glare of a public listing is also established ground for James. However, he says that while the leadership of Blackstone was “well prepared for the technicalities” of a listing, accomplished last June, he was surprised by the volume of the fanfare the listing received, as well as by the steep subsequent decline of Blackstone's share price. “As much press as Blackstone gets, I think we were a little shocked at the amount of press that was triggered by our IPO and all the things that go with that,” says James. “It seems to be a daily barrage of multiple articles. We thought [the IPO] would be noteworthy, but not a crescendo for a multi-month period.”

Stamping out market chatter that Blackstone is postioned to buy one of the big faltering investment banks, James says: “No way. No interest. I've been trying to get away from that for years.”

He adds: “Shortly after we went public, we had the credit market implosion. All the financial services stocks are down substantially. Anything that relies on leverage is challenging now. We were quite concerned about the market environment, but we certainly didn't expect our stock – or any of the financial services stocks – to be as weak as they've been. We're down consistent with the others, but still it wasn't what we planned, that's for sure.”

Despite the stock-price setback, James still marvels at the growth of private equity, and at the dominant position Blackstone has in it. “When I started DLJ's private equity business in 1985, it just looked like a good opportunity to make some money with the firm's capital and drive some of our fee paying businesses at the same time. I had no idea that it would grow to the scale that it has, frankly. It's become a much bigger business and much more global than I think anyone could have predicted. I think it's a great business so I'm very glad to be at Blackstone.”

James says Blackstone is going further than the post-merger DLJ Merchant Banking Partners was capable of, and much further than any of the in-house merchant banking operations of bulge-bracket investment banks.

James has followed with interest the recent trend for investment banks to relaunch private equity principal investment platforms following earlier spin-outs and downsizings. “Typically what happens is that at a cyclical peak they all want to be in [private equity]. Then it goes through the reverse cycle and they want to cut back. Some of them have been through the cycle several times.”

Speaking as one who oversaw a business that provided M&A advisory services alongside its private equity investment programme, James says that investment banks “have a ton of conflicts that Blackstone doesn't have that, in my view, limit their ability to earn the best returns for LPs. It's very tough to balance those conflicts with the responsibilities to a big securities firm. Their organisational commitment ebbs and flows. Very few of them are positioned to be top quartile players.”

Stamping out market chatter that Blackstone is positioned to buy one of the big faltering investment banks, James says: “No way. No interest. I've been trying to get away from that for years.”