The Art of Opportunity
Good opportunities rarely appear before closed eyes. Great opportunities never appear before closed minds.
A hunter sitting silently in the woods only sees opportunity in the subtle spots of whitetail tan hidden in the camouflaged underbrush. A daydream, and he misses it. A nod for a nap, and it passes him by. A glance in the wrong direction, and it’s gone.
Opportunity in business appears much like opportunity in the woods. A blink of hesitation, prejudgment, or misplaced attention, and it disappears faster than a shooting star.
In the early days of Blackstone – now the world’s largest alternative asset manager – opportunity appeared in disguise. Stephen Schwarzman and Pete Peterson, expected easy business when they founded the firm in 1985. Instead, they were met mostly with crickets. One of those crickets arrived on a Harley Davidson.
Schwarzman answered a knock on his Park Avenue office door to find what looked like a member of the Hell’s Angels looking back at him. The man was wearing full motorcycle leathers and holding a helmet under his arm. Confused, Schwarzman asked what the man was delivering.
He wasn’t delivering anything. He was simply there to talk. His sister had worked for Schwarzman years before at Lehman Brothers. Still confused, Schwarzman invited him in. The men sat on the floor in the unfurnished office and discussed the guest’s real estate business plans.
The unexpected visitor was Sam Zell – a man who went on to build a real estate empire of six hundred commercial properties comprising 100 million square feet of office space.
Unknown to Schwarzman at the time, Zell would eventually bring him billions in profits. Reflecting on the meeting, he remarked, “This one unexpected visitor turned out to be worth more to Blackstone than all the clients we expected in those early days who never came.”
Like the hunter scanning the horizon in the pre-dawn light, Schwarzman saw the shapes of opportunity dancing in the distance. As a hunter would mark the movement and wait for the light of the sun, Schwarzman saw potential in Zell and fostered a relationship.
The road less traveled
Schwarzman was good at spotting the opportunities through the brush. He was also willing to take chances when the path ahead looked more like a liability than an opportunity.
After meeting Zell, but still in the early years of Blackstone, Schwarzman needed a bank to finance his first leveraged buyout deal. His preference was JP Morgan. They were the big name in banking, and he knew a partnership would help the Blackstone brand. To Schwarzman’s delight, JP Morgan was willing to do the deal. To his dismay, they wouldn’t underwrite it.
At this inflection point, Schwarzman passed on the prestige of The House of Morgan for a smaller, much less respected, but much more accommodating Chemical Bank. Like Blackstone, this was also Chemical Bank’s first leveraged buyout deal.
Sometimes a hungry, young employee is a better hire than the industry veteran who’s already made it. Sometimes partnering with a start-up means more personalized service than using the giant household name. Sometimes putting your faith in the underdog pays returns you’d never imagine. This was the case for Schwarzman and Chemical Bank. JP Morgan didn’t need Blackstone’s business. Chemical Bank did. According to Schwarzman, they proved to be “enthusiastic, entrepreneurial, open, and collaborative.”
In a satisfyingly ironic sequence of events, Chemical Bank ultimately purchased JP Morgan and kept the JP Morgan name. The three men from Chemical who had been so accommodating to Blackstone on their first deal went on to become the CEO of Chase Manhattan, CEO of JPMorgan Chase, and head of investment banking at JPMorgan Chase.
In finding and acting on a seemingly disguised opportunity in the late eighties, Schwarzman reaped the benefits of a strong partnership and ultimately a network of powerful allies for decades.
No job too dirty
Where other asset managers might scoff at a potential partner or compromise terms to work with a prestigious banker, Schwarzman set ego aside and pulled profits to the forefront.
His approach was no different after The Great Recession. After millions of foreclosures between 2008 and 2012, the housing market was in rough shape. Americans needed homes, but lending standards were stricter than the dress code at a Catholic high school.
Schwarzman and Blackstone noticed an untapped market: rental properties.
Individual investors own nearly 75% of rental properties in the United States. Many of those investors are absentee landlords who don’t value customer service. With rental demand surging after the recession, house prices at record lows, and renters desiring a better experience, Blackstone found the perfect storm of investment opportunity.
You may not think the largest alternative asset manager in the world would be pounding pavement and buying single family rentals, but that’s exactly what they did. With the goal of providing high quality, well managed units, they began buying properties in 2012 at the bottom of the market. Blackstone sent teams to scout foreclosed properties, drive the streets, and research the school districts. Once they had their targets, they would head to the courthouse steps - cashier’s checks in hand - to buy houses at auction.
As Blackstone got up to speed, they were buying $125 million worth of homes on a weekly basis. By a conservative estimate, Blackstone was closing on more than 600 homes every single week! The manpower alone necessary for this level of execution is staggering.
After buying the homes, they would spend $25,000 renovating each one. During a period with unemployment over seven percent, Blackstone employed more than ten thousand trade workers, many of whom would have otherwise been unemployed.
As part of the process, Blackstone established a company to manage and own the properties. They called it Invitation Homes, and it became the largest residential property owner in the United States with more than fifty thousand homes.
Many asset managers would’ve turned up their nose at such a labor intensive undertaking. Sam Zell - a real estate tycoon - advised against it. But Schwarzman and Blackstone are open to opportunity, regardless of its form.
The return of Sam Zell
Stephen Schwarzman and Sam Zell had stayed in touch since their first strange meeting in 1986. During that time, Zell was building a real estate empire. By 2006, his company, Equity Office Properties Trust, was the largest owner of office buildings in the United States. Ready for retirement, and smelling the scent of recession, Zell wanted to sell his empire. Schwarzman wanted to buy it.
Blackstone eventually acquired Zell’s company for $39 billion - one of the largest real estate transactions in history. A detailed analysis of the deal estimates Blackstone tripled their initial investment of $3.5 billion.
Always alert for opportunity and always open to stretching his comfort zone, Schwarzman warmly welcomed his leather clad, Harley-riding guest in 1986. Where many people would’ve shut the door, Schwarzman found and embraced his $10 billion opportunity.
Embracing our opportunities
The examples are easiest to spot in business, but opportunity in our own lives often appears like a deer in the woods or a man on a motorcycle. It arrives at strange times or in unexpected places. It makes you uncomfortable. It’s easy to pass by or miss altogether.
The most interesting paths are trodden by those whose eyes are always open to opportunity. They are walked by the people who take chances and stray from their comfort zone.
The opportunities appear during conversations with strangers on a train. They are job offers from loose connections. They are invitations to events from friends you haven’t seen in years. But the opportunities don’t happen if your eyes are closed or if you trade possibility for comfort.
The greatest among us find frequent opportunity, and they seize it when the time is right.
Will you?
