In King of Capital, David Carey and John Morris show how Blackstone (and other private equity firms) transformed themselves from gamblers, hostile-takeover artists, and ‘barbarians at the gate’ into disciplined, risk-conscious investors while the financial establishment—banks and investment bankers such as Citigroup, Bear Stearns, Lehman, UBS, Goldman Sachs, Merrill Lynch, Morgan Stanley—were recklessly assuming risks, leveraging up to astronomical levels and driving the economy to the brink of disaster. Now, not only have Blackstone and a small coterie of competitors wrested control of corporations around the globe, but they have emerged as a major force on Wall Street, challenging the likes of Goldman Sachs and Morgan Stanley for dominance.
Insightful and hard-hitting, filled with never-before-revealed details about the workings of a heretofore secretive company that was the personal fiefdom of Schwarzman and Peter Peterson, 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.
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About the Author
JOHN E. MORRIS has been a Bloomberg Brief editor, an editor with Dow Jones Investment Banker, and was for many years an assistant managing editor at The Deal in New York and London. Before that, he was an editor and writer at The American Lawyer magazine.
To find out more visit: www.king-of-capital.com
Read an Excerpt
"More Rumors About His Party Than About His Deals,” blared the front-page headline in the New York Times in late January 2007. It was a curtain-raiser for what was shaping up to be the social event of the season, if not the era. By then, the buzz had been building for weeks.
Stephen Schwarzman, cofounder of the Blackstone Group, the world’s largest private equity ﬁrm, was about to turn sixty and was planning a fête. The ﬁnancier’s lavish holiday parties were already well known in Manhattan’s moneyed circles. One year Schwarzman and his wife decorated their twenty-four-room, two-ﬂoor spread in Park Avenue’s toniest apartment building to resemble Schwarzman’s favorite spot in St. Tropez, near their summer home on the French Riviera. For his birthday, he decided to top that, taking over the Park Avenue Armory, a fortiﬁed brick ediﬁce that occupies a full square block amid the metropolis’s most expensive addresses.
On the night of February 13 limousines queued up and the boldface names in tuxedos and evening dresses poured out and ﬁled past an encampment of reporters into the hangarlike armory. TV perennial Barbara Walters was there, Donald and Melania Trump, media diva Tina Brown, Cardinal Egan of the Archdiocese of New York, Sir Howard Stringer, the head of Sony, and a few hundred other luminaries, including the chief executives of some of the nation’s biggest banks: Jamie Dimon of JPMorgan Chase, Stanley O’Neal of Merrill Lynch, Lloyd Blankfein of Goldman Sachs, and Jimmy Cayne of Bear Stearns.
Inside the cavernous armory hung “a huge indoor canopy . . . with a darkened sky of sparkling stars suspended above a grand chandelier,” mimicking the living room in Schwarzman’s $30 million apartment nearby, the New York Post reported the next day. The decor was copied, the paper observed, “even down to a grandfather clock and Old Masters paintings on the wall.”
R&B star Patti LaBelle was on hand to sing “Happy Birthday.” Beneath an immense portrait of the ﬁnancier—also a replica of one hanging in his apartment—the headliners, singer Rod Stewart and comic Martin Short, strutted and joked into the late hours. Schwarzman had chosen the armory, Short quipped, because it was more intimate than his apartment. Stewart alone was known to charge $1 million for such appearances.
The $3 million gala was a self-coronation for the brash new king of a new Gilded Age, an era when markets were ﬂush and crazy wealth saturated Wall Street and especially the private equity realm, where Schwarzman held sway as the CEO of Blackstone Group.
As soon became clear, the birthday affair was merely a warm-up for a more extravagant coming-out bash: Blackstone’s initial public offering. By design or by luck, the splash of Schwarzman’s party magniﬁed the awe and intrigue when Blackstone revealed its plan to go public ﬁve weeks later, on March 22. No other private equity ﬁrm of Blackstone’s size or stature had attempted such a feat, and Blackstone’s move made official what was already plain to the ﬁnancial world: Private equity—the business of buying companies with an eye to selling them a few years later at a proﬁt—had moved from the outskirts of the economy to its very center. Blackstone’s clout was so great and its prospects so promising that the Chinese government soon came knocking, asking to buy 10 percent of the company.
When Blackstone’s shares began trading on June 22 they soared from $31 to $38, as investors clamored to own a piece of the business. At the closing price, the company was worth a stunning $38 billion—one-third as much as Goldman Sachs, the undisputed leader among Wall Street investment banks.
Going public had laid bare the fantastic proﬁts that Schwarzman’s company was throwing off. So astounding and sensitive were those ﬁgures that Blackstone had been reluctant to reveal them even to its own bankers, and it was not until a few weeks before the stock was offered to investors that Blackstone disclosed what its executives made. Blackstone had produced $2.3 billion of proﬁts in 2006 for the ﬁrm’s sixty partners—a staggering $38 million apiece. Schwarzman personally had taken home $398 million that year.
That was just pay. The initial public offering, or IPO, yielded a second windfall for Schwarzman and his partners. Of the $7.1 billion Black-stone raised selling 23.6 percent of the company to public investors and the Chinese government, $4.1 billion went to the Blackstone partners themselves. Schwarzman personally collected $684 million selling a small fraction of his stake. His remaining shares were worth $9.4 billion, ensuring his place among the richest of the rich. Peter Peterson, Blackstone’s eighty- year- old, semiretired cofounder, garnered $1.9 billion.
The IPO took place amid a ﬁnancial revolution in which Blackstone and a coterie of competitors were wresting control of corporations around the globe. The private equity, or leveraged buyout, industry was ﬂexing its muscle on a scale not seen since the 1980s. Blackstone, Kohlberg Kravis Roberts and Company, Carlyle Group, Apollo Global Management, Texas Paciﬁc Group, and a half-dozen others, backed by tens of billions of dollars from pension funds, university endowments, and other big investors, had been inching their way up the corporate ladder, taking over $10 billion companies, then $20 billion, $30 billion, and $40 billion companies. By 2007 private equity was behind one of every ﬁve mergers worldwide and there seemed to be no limit to its ambition. There was even talk that a buyout ﬁrm might swallow Home Depot for $100 billion.
Private equity now permeated the economy. You couldn’t purchase a ticket on Orbitz.com, visit a Madame Tussauds wax museum, or drink an Orangina without lining Blackstone’s pockets. If you bought coffee at Dunkin’ Donuts or a teddy bear at Toys “R” Us, slept on a Simmons mattress, skimmed the waves on a Sea- Doo jet ski, turned on a Grohe designer faucet, or purchased razor blades at a Boots pharmacy in London, some other buyout ﬁrm was beneﬁting. Blackstone alone owned all or part of ﬁfty-one companies employing a half-million people and generating $171 billion in sales every year, putting it on a par with the tenth-largest corporation in the world.
The reach of private equity was all the more astonishing for the fact that these ﬁrms had tiny staffs and had long operated in the shadows, seldom speaking to the press or revealing details of their investments. Goldman Sachs had 30,500 employees and its proﬁts were published every quarter. Blackstone, despite its vast industrial and real estate holdings, had a mere 1,000 employees and its books were private until it went public. Some of its competitors that controlled multibillion-dollar companies had only the sketchiest of websites.
Remarkably, Blackstone, Kohlberg Kravis, Carlyle, Apollo, TPG, and most other big private equity houses remained under the control of their founders, who still called the shots internally and, ultimately, at the companies they owned. Had there been any time since the robber barons of the nineteenth century when so much wealth and so many productive assets had come into the hands of so few?
Private equity’s power on Wall Street had never been greater. Where buyout ﬁrms had once been supplicants of the banks they relied on to ﬁnance their takeovers, the banks had grown addicted to the torrent of fees the ﬁrms were generating and now bent over backward to oblige the Blackstones of the world. In a telling episode in 2004, the investment arms of Credit Suisse First Boston and JPMorgan Chase, two of the world’s largest banks, made the mistake of outbidding Blackstone, Kohlberg Kravis, and TPG for an Irish drugmaker, Warner Chilcott. Outraged, Kohlberg Kravis cofounder Henry Kravis and TPG’s Jim Coulter read the banks the riot act. How dare they compete with their biggest clients! The drug takeover went through, but the banks got the message.
JPMorgan Chase soon shed the private equity subsidiary that had bid on the drug company and Credit Suisse barred its private equity group from competing for large companies of the sort that Blackstone, TPG, and Kohlberg Kravis target.
What People are Saying About This
"[King of Capital] ranks as one of the most even-handed treatments of the industry." -Bloomberg Brief: Merger