Our continuing series of profiles of financial firms looks at the evolution of Blackstone, the most public private-equity outfit
Published on The Economist, Aug 19, 2010.
BLACKSTONE is used to wowing people with the size of its deals. The firm has taken part in seven of the 25 largest leveraged buy-outs in history. In 2006 it bought Freescale Semiconductor, a chipmaker, for $17.6 billion, and Equity Office Properties for $38.9 billion; it forked out $25.8 billion for Hilton Hotels in 2007. Times have changed. On August 13th Blackstone announced it would buy Dynegy, an energy firm, for nearly $5 billion, the largest buy-out of the year so far but a sum that would scarcely have turned heads in the boom.
Back then Blackstone’s boss, Steve Schwarzman, was crowned the “new king of Wall Street” and “master of the alternative universe” for his firm’s ability to secure financing and do record-breaking deals. But since debt markets seized up in 2007 buy-out firms have had trouble making acquisitions. The failure to deploy the capital investors had already given them has made it harder for some to raise more … //
… Banks are retreating from some of the areas where the firm operates. Its biggest rivals in property—Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley—have either gone bankrupt or significantly curbed their investments in this area. Blackstone recently took over running Bank of America-Merrill Lynch’s Asian property operations, presumably until its owner feels it can get a high enough price to warrant selling the assets. The Volcker rule, which puts limits on banks’ ability to invest capital in alternative assets, could also help Blackstone. BAAM’s seeding fund, which invests in start-up hedge-fund managers in return for a share of their profits, is likely to benefit as banks scale back, for example.
Blackstone may also expand into yet more areas. It could launch its own hedge fund, offer new credit products or even enter asset management for high-net-worth clients. “I never looked at us as being in the private-equity business,” says Mr Schwarzman. “You invent new areas to be in.” But that means coming face-to-face with established competitors, many of them much bigger than Blackstone. And adding more products will only increase potential conflicts of interests between its different units, such as its advisory and buy-out arms.
Another source of trouble is Washington. Politicians are considering proposals to tax the “carried interest” of private-equity executives at higher income-tax rates. One component of the proposal, dubbed the “Blackstone bill”, is aimed at publicly traded investment partnerships which, because of the way they structure themselves, are not even taxed at corporate rates. If the change at last makes its way through Washington, DC, after years of deliberation and lobbying, that could further dent Blackstone’s profits and share price.
Mr Schwarzman has made matters worse by comparing the Obama administration’s “war” against business to Hitler’s invasion of Poland in 1939. He apologised for the comments this week. Blackstone may be on its way to becoming a diversified financial institution. But to many the firm still embodies the excesses of the buy-out boom. Gaffes like that don’t help. (full text).
Comments of the Week: Davies, Radford, Gelles, and Knibbe discuss Bruce Edmonds’ 5 suggestions, on Real-World Economics Review Blog, by Bruce Edmonds, August 15, 2010;
Economics and time, on Real-World Economics Review Blog, by David Ruccio, August 9, 2010.