BOOK REVIEW: ‘King of Capital’: The Blackstone Group, Other Private Equity Firms Dissected; Are They ‘Barbarians at the Gate’ or Source of Growth Capital That Keeps Companies Profitable?

• Reviewed by David M. Kinchen

John Dickerson’s Feb. 2, 2012 column in Slate about the cluelessness of Mitt Romney in 2012 and Barack Obama in 2008 (with his remark about certain people “clinging to guns and religion”) reminded me once again how out of touch with the rest of us the rich and privileged really are.  (Link:www.slate.com/…/romney_is_not_concerned_about_the_very_poor).

Romney, who appears to be  the presumptive GOP nominee, told CNN the day after his Florida triumph: “I’m not concerned about the very poor. We have a safety net there. If it needs repair, I’ll fix it. I’m not concerned about the very rich, they’re doing just fine. I’m concerned about the very heart of America, the 90 percent, 95 percent of Americans who right now are struggling.”

Yes, I know that Romney, who grew up in a life of privilege in the rich suburbs of Detroit, is far richer than Obama, raised by a single mother and grandparents, but both men have the advantages of Ivy League educations, as did Steven Schwarzman, the central figure of “The King of Capital: The Remarkable Rise, Fall, and Rise Again of Steven Schwarzman and Blackstone” (Crown Business trade paperback, 400 pages, $16.00) by David Carey and John E. Morris.

Peter G. Peterson

The authors have updated the 2010 hardback edition with a chapter about how the Blackstone Group, founded  in 1985 with an investment of $400,000 by Steven A. Schwarzman and Peter G. Peterson, is faring after the 2007-08 financial crisis. This is an important book for anyone trying to get a handle on the complex financial meltdown that’s ongoing — despite the official pronouncement  that the recession officially ended in mid-2009 (talk about cluelessness!). The authors debunk myths about private equity firms, which have gotten a bad reputation, in contrast to the venture capital companies of the San Francisco Bay Area which are credited with the rise of Silicon Valley.

The authors provide several mentions of Bain Capital, Romney’s old firm, which has a private equity unit similar to  Blackstone’s. They also discuss the pioneering firm in the field, Kohlberg Kravis Roberts and Co. (AKA KKR — the firm in the 1990 book and subsequent 1993 movie “Barbarians at the Gate”), Texas Pacific Group (TPG), Forstmann Little & Co.,  and the rest of the private equity companies.

Steven A. Schwarzman

In contrast to the somewhat disapproving tone of the 1990 book “Barbarians at the Gate  by Brian Burrough and John Helyar,  Carey and Morris use a fair and balanced, contrarian tone as tell the story of Steve Schwarzman and Blackstone, the financier and his financial powerhouse that avoided the self-destructive tendencies of Wall Street.  Carey and  Morris show how Blackstone — and other private equity firms– represent a new breed of capitalist, a cross between the great bankers and corporate chieftains. Like banks, private equity firms provide capital, but unlike banks they take control of the companies they finance.

Private equity firms have transformed themselves from gamblers, hostile-takeover artists, and ‘Barbarians at the Gate’ into disciplined, risk-conscious investors, but the bad reputation lingers, with private equity firms accused of a multitude of sins, according to the authors. With nearly $30 billion of capital at Blackstone’s disposal, there’s no doubt in the minds of the authors that Blackstone is poised to regain its pre-rececession role as a major player.

 Blackstone reinforced its player role when on March 22, 2007 it filed a draft proposal with the Securities and Exchange Commission (SEC)   to raise $4 billion in an initial public offering. On June 21, Blackstone sold a 12.3% stake in its ownership for $4.13 billion in the largest U.S. IPO since 2002. Traded on the New York Stock Exchange under the ticker symbol BX, Blackstone priced at $31 per share on June 22, 2007.  Less than two weeks after the Blackstone IPO, in July 2007, rival private equity firm, Kohlberg Kravis Roberts (KKR), followed suit, filing an IPO.

The financial establishment—banks and investment bankers such as Citigroup, Bear Stearns, Lehman, UBS, Goldman Sachs, Merrill Lynch, Morgan Stanley — were the cowboys, recklessly assuming risks, leveraging up to astronomical levels and driving the economy to the brink of disaster.

Blackstone, Forstmann Little, KKR, TPG and the other firms fiercely compete for business and they are now ready to spend the billions of dollars they’ve accumuated that can be invested at a time when the market is starved for capital, according to the authors, both experienced business journalists who don’t hesitate to strip away the myths surrounding takeovers.

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  Goldman Sachs and Morgan Stanley for dominance.

Talk about the Odd Couple!   Peterson, born in 1926, was the son of a Greek-American diner owner in Kearney, Nebraska. He rose to be the CEO of the Chicago-based movie camera and projector maker Bell & Howell, and was the Commerce Secretary in the Nixon  administration. He met Schwarzman, born in 1947, an upper middle class Jewish American who grew up in the Philadelphia suburbs, when they both worked at Lehman Brothers. Schwarzman had an impeccable Ivy League background, with a bachelor’s degree from Yale — where he was the first Jew to be tapped by Skull and Bones — and an MBA from Harvard Business School.

Schwarzman and Peterson started out in mergers and acquisitions — two guys and a secretary —  and grew their private partnership to being one of Wall Street’s most powerful institutions, far outgrowing its much older rival KKR. Steve Schwarzman had a pay packet one year of $398 million and $684 million from the Blackstone IPO and Blackstone came to epitomize the spectacular new financial fortunes amassed in the 2000s. The name Blackstone represents a translation of schwarz — German for black– and  peter or petra, Greek for stone or rock, representing Schwarzman’s last name and Peterson’s first.

The authors delve deeply into the controversies surrounding Blackstone and whether it and other private equity firms suck the lifeblood out of companies to enrich themselves—or whether they are a force that helps make the companies they own stronger and thereby better competitors.

 Personally, I don’t see much of a difference between Warren Buffett’s publicly traded Berkshire Hathaway, which owns many companies and holds onto them for a long time, and Blackstone, which — among many other companies — owns the Hilton hotel chain and which bought Sam Zell’s Equity Office Properties and holds onto many buildings.

  TPG and KKR — together with Goldman Sachs Capital Partners — bought Texas gas and electric utility TXU (my electricity firm in deregulated Texas, where consumers can pick and choose their utility) in a record-breaking transaction valued at  $44.36 billion. The TXU transaction still stands as the largest buyout in history.   While the book is filled with many similar Inside Baseball financial details — which the authors skillfully present in terms that most readers can  understand — it should appeal to any reader who wants to know how the private equity business works in the real world.

About the Authors

DAVID CAREY is senior writer for The Deal, a news service and magazine covering private equity and mergers and acquisitions. Before joining The Deal he was the editor of Corporate Finance magazine and wrote for Adweek, Fortune, Institutional Investor, and Financial World.

JOHN E. MORRIS, now an editor with Dow Jones Investment Banker, was for many years an assistant managing editor at The Deal in New York and London and before that was an editor and writer at The American Lawyer magazine.

Website: www.king-of-capital.com