King of Capital

1. The Rise of Blackstone: From Humble Beginnings to Wall Street Powerhouse

"I want war—not a series of skirmishes," he was quoted as saying. "I always think about what will kill off the other bidder.… I didn't get to be successful by letting people hurt Blackstone or me."

From scratch to success. In 1985, Pete Peterson and Stephen Schwarzman founded Blackstone with just $400,000 in seed capital. They faced initial struggles, including difficulty raising their first fund and landing advisory assignments. However, their persistence and strategic approach paid off.

Key milestones:

• 1987: Raised first fund of $850 million
• 1989: Completed first major buyout (CNW Corporation)
• 1990s: Expanded into real estate and other alternative investments
• 2007: Went public in a landmark IPO, valuing the firm at $33 billion

By the mid-2000s, Blackstone had become one of the largest and most influential private equity firms globally, managing hundreds of billions of dollars across various asset classes and industries.

2. Private Equity's Evolution: Transforming Corporate America and Beyond

"These people were very influential," says Robert Bruner, the dean of the Darden School of Business at the University of Virginia. Not only did they help unlock resources and displace sleepy managements, he says, but "the buyout wave and the raiders really liberalized the way we look at the generation of value by companies and the delivery of that value."

Reshaping corporate landscape. Private equity firms like Blackstone played a crucial role in transforming corporate America from the 1980s onward. They introduced new approaches to creating value and improving operational efficiency in companies.

Key impacts of private equity:

• Challenged traditional corporate structures and management practices
• Introduced more rigorous financial discipline and performance metrics
• Accelerated corporate restructuring and divestitures
• Sparked debates about short-term vs. long-term value creation

The industry's influence extended beyond the U.S., with firms like Blackstone increasingly pursuing global opportunities and applying their strategies to companies worldwide.

3. The Art of the Deal: Blackstone's Strategies for Success

"We looked at this and said, 'Geez. It's a massive market, there's only one guy, Deutsche Telekom, offering local telephony. If we upgrade the infrastructure and get a small piece of the phone market,' " the payoff could be huge, says Simon Lonergan, the associate who relocated to his native Britain in 2000 and was Blackstone's liaison to Callahan's managers.

Strategic deal-making. Blackstone's success was built on its ability to identify and execute profitable deals across various sectors and market conditions. The firm developed a reputation for its disciplined approach and innovative strategies.

Key elements of Blackstone's deal-making approach:

• Thorough due diligence and risk assessment
• Focus on undervalued or mismanaged assets
• Creative deal structures, including partnerships with strategic buyers
• Ability to execute complex, large-scale transactions
• Patience to wait for the right opportunities

Examples of notable deals include the acquisitions of Equity Office Properties, Hilton Hotels, and Freescale Semiconductor, each demonstrating Blackstone's ability to create value through financial engineering and operational improvements.

4. Leveraging Debt: The Double-Edged Sword of Private Equity

To those outside Wall Street circles, the nearest analogy is an income property where the rent covers the mortgage, property taxes, and upkeep.

Power and peril of leverage. The use of debt to finance acquisitions is a fundamental aspect of private equity, allowing firms to amplify returns but also introducing significant risks.

How leverage works in private equity:

• Firms typically use a combination of equity and debt to finance acquisitions
• Debt magnifies returns when investments perform well
• However, it also increases the risk of losses if companies struggle

The evolving debt markets played a crucial role in the private equity boom of the mid-2000s, with innovations like collateralized loan obligations (CLOs) enabling increasingly large and leveraged buyouts. However, the 2008 financial crisis exposed the vulnerabilities of this model, leading to challenges for many highly leveraged portfolio companies.

5. Market Cycles and Timing: Navigating Economic Ups and Downs

"You've got to have a lot of respect for the cycles," Chu says, looking back. "No matter how smart an investor you are and no matter how great the company and its management team are, if you invested in U.S. or European chemicals in 2007 and exited in 2010, you'd take a loss."

Riding the waves. Blackstone's success was partly due to its ability to navigate economic cycles, timing investments and exits to maximize returns.

Key aspects of Blackstone's approach to market cycles:

• Maintaining discipline in frothy markets
• Opportunistically investing during downturns
• Diversifying across sectors and geographies
• Structuring deals to provide flexibility in different economic scenarios

The firm's experience during the 2008 financial crisis and its aftermath demonstrated both the challenges and opportunities presented by economic volatility. While some investments struggled, Blackstone's overall portfolio proved resilient, and the firm was able to capitalize on distressed opportunities in the crisis's wake.

6. The Human Element: Key Players and Personalities in Blackstone's Story

"Steve and Pete were very close," says Jonathan Colby, a partner at Carlyle who worked at Blackstone in the early 1990s. "Each knew what the other was thinking. It was like they communicated telepathically."

Leadership and talent. The success of Blackstone was largely driven by the personalities, skills, and relationships of its key leaders, particularly Stephen Schwarzman and Pete Peterson.

Notable figures in Blackstone's history:

• Stephen Schwarzman: Co-founder and CEO, known for his ambition and deal-making prowess
• Pete Peterson: Co-founder, brought Wall Street and political connections
• Tony James: Joined in 2002, played a crucial role in professionalizing the firm
• Other key partners and executives who contributed to various aspects of the business

The book highlights the complex dynamics between these individuals, including their strengths, conflicts, and the evolution of their roles over time. It also underscores the importance of attracting and retaining top talent in the competitive world of private equity.

7. Going Public: Blackstone's IPO and Its Impact on the Industry

"If we don't do it, someone else will" was the consensus around the table at the first Project Puma meetings, Puglisi recalls. "If someone else does it, everyone will have to follow. That's the law of Wall Street."

Breaking new ground. Blackstone's decision to go public in 2007 was a watershed moment for the private equity industry. The IPO raised $4.1 billion and valued the firm at $33 billion, making it one of the largest public offerings in U.S. history at the time.

Key aspects of Blackstone's IPO:

• Provided liquidity for the firm's partners
• Raised capital for expansion and acquisitions
• Increased public scrutiny of the firm and the industry
• Set a precedent for other private equity firms considering public listings

The IPO also sparked debates about the potential conflicts between public shareholders and the firm's traditional focus on long-term value creation for its fund investors. It marked a new era of transparency and public accountability for a previously opaque industry.

8. The 2008 Financial Crisis: Private Equity's Reckoning and Resilience

Market conditions worsened steadily as 2007 dragged on, and buyout firms breathed a sigh of relief every time they wiggled out of a deal.

Weathering the storm. The 2008 financial crisis and its aftermath presented significant challenges for Blackstone and the broader private equity industry. Many deals made at the peak of the market struggled under heavy debt loads as the economy contracted.

Impact of the crisis on private equity:

• Collapse of the leveraged finance market
• Declining valuations of portfolio companies
• Difficulty exiting investments
• Increased scrutiny from regulators and the public

However, the crisis also created opportunities for firms with available capital to invest in distressed assets. Blackstone's diversified business model and disciplined approach to risk management helped it navigate the turbulent period better than many of its peers.

9. Ethical Considerations: The Debate Over Private Equity's Role in Society

The capital gains advantage was not unique to private equity or hedge funds. It stemmed from general principles of tax and partnership law and the gaping differential between the tax rates on ordinary income and capital gains.

Controversy and criticism. As private equity firms like Blackstone grew in size and influence, they faced increasing scrutiny and criticism over their business practices and societal impact.

Key ethical debates surrounding private equity:

• Job losses resulting from cost-cutting measures in portfolio companies
• Tax advantages enjoyed by private equity firms and their partners
• The industry's role in exacerbating income inequality
• Questions about the long-term value creation vs. short-term profit extraction

The book explores these controversies, presenting different perspectives on the industry's overall impact on the economy and society. It highlights the tension between private equity's claims of creating value and improving efficiency, and criticisms of its sometimes aggressive tactics and focus on financial engineering.

Last updated: January 23, 2025