12 When Bar Technologies: Steel industry analyst Charles Bradford, quoted by Len Boselovic, “Heavy Metal Buyout Owners of Former Johnstown Steel Plant Make a Bid for Company that Owns Beaver Falls Plant,” Pittsburgh Post-Gazette, July 25, 1998.
13 “The pension payouts”: Background interview with a source involved in the Republic deal.
14 In addition to the stream: Information on the events leading up to Stockman’s departure from Blackstone came chiefly from background interviews with two former Blackstone colleagues and another person who worked closely with Stockman.
Chapter 13: Tuning in Profits
1 The world’s largest insurance: AIG press release, “AIG to Invest $1.35 Billion in The Blackstone Group and Its Funds,” Aug. 30, 1998.
2 Forbes and BusinessWeek: Matthew Schifrin, “LBO Madness,” Forbes, Mar. 9, 1998; Stanley Reed, “Buyout Fever! LBOs Are Changing the Face of Dealmaking in Europe,” BusinessWeek, June 14, 1999.
3 The IPO of Netscape: David Henry, “Netscape Investors Bet on a Dream,” USA Today, Aug. 9, 1995.
4 The next year Yahoo!: Rose Aquilar, “Yahoo IPO Closes at $33 after $43 Peak,” CNET News, Apr. 12, 1996.
5 Gallogly was the odd one out: Personal observation; background interviews with a Blackstone investor and with three former colleagues.
6 Gallogly became intrigued: Mark Gallogly interviews, July 17, 2008 and Feb. 24, 2009; Bret Pearlman interviews, Oct. 22, 2008 and Feb. 11, 2009; Simon Lonergan interview, Jan. 22, 2009; Lawrence Guffey interview.
7 The first deal: Gallogly interview, Feb. 24, 2009; Pearlman interview, Oct. 22, 2008; Lonergan interview.
8 Beginning in 1998: David Carey, “Short Circuited or Hard-Wired?” Deal, Feb. 28, 2003.
9 Convinced that new technology: Guffey interview, confirmed by Blackstone.
10 “Paul Allen seemed to believe”: Lonergan interview; Pearlman interview, Feb. 11, 2009.
11 In fact, the prices: Carey, “Short Circuited.”
12 But Allen’s folly: Confirmed by Blackstone.
13 On top of the cable deals: Gallogly interview, Feb. 24, 2009; Lonergan interview.
14 Gallogly’s very success: Stephen Schwarzman interview; Gallogly interview, Feb. 24, 2009.
15 “There was a growing concern”: Peter Peterson written response to fact-checking query.
16 “We hit a fork” … “There was more risk”: Peterson, Schwarzman, and Robert Friedman interviews.
17 It also wasn’t clear: Lonergan interview.
Chapter 14: An Expensive Trip to Germany
1 Microsoft had displaced: “The FT 500—Global 500, Section One,” Financial Times, May 4, 2000.
2 With some venture funds: See, e.g., Regents of the University of California, Alternative Investments as of March 31, 2003.
3 Venture firms, which had attracted: Venture Economics/Thomson Financial and National Venture Capital Association press release, “Strong Fund Reserves Diminish Need for Venture Capitalists to Raise Additional Capital,” May 6, 2002.
4 This rearranged the map: John Gorham, “Go West, Rich Men,” Forbes, Oct. 12, 1998. “Forbes 400 Richest in America,” Forbes, Oct. 1999. Peterson and Schwarzman may well have deserved to be included toward the bottom of the list, based on the valuation of Blackstone implied by AIG’s investment in 1998 and the profits they had earned from the firm over the years.
5 Blackstone couldn’t help but feel: Stephen Schwarzman interviews; Bret Pearlman interviews, Oct. 22, 2008, and Feb. 11, 2009.
6 Schwarzman threw a bone: Schwarzman interviews; Pearlman interview, Oct. 22, 2008; $7 million figure from Blackstone.
7 It plowed $227 million: Pearlman interview, Oct. 22, 2008.
8 The grandest plan … The physical networks: Interview with William Obenshain, former Bank of America executive, Feb. 29, 2009; Simon Lonergan interview, Jan. 22, 2009; background interviews with two other sources involved with the investment.
9 But the management team … “These [meetings] were very unpleasant”: Obenshain interview; background interviews with three sources involved with the investment.
10 “Where’s my fucking money?”: Background interview with a source with ties to Callahan.
11 “I was really furious”: Schwarzman interview.
12 Two-thirds of the investments: Materials for offsite meeting of Blackstone private equity group, volume 1, part II, 18, Apr. 21, 2006.
13 “The pain we took”: David Blitzer interview.
14 From there it was all downhill: Dealogic data compiled for the authors on Apr. 7, 2009 (IPO and junk-bond issues).
15 As stinging as Blackstone’s losses: David Carey, “Why the Telcos Burned the Buyout Shops,” Deal, Nov. 17, 2000.
16 Exacerbating its woes: Vyvyan Tenorio and John E. Morris, “Ted Forstmann Testifies in Trial,” Deal, June 1, 2004; “Jury Finds Forstmann Little Liable on All Counts,” Reuters, July 1, 2004.
17 When Tom Hicks: Jonathan Braude and David Carey, “Hicks Europe Wing on Its Own,” Deal, Jan. 21, 2005; David Carey, “Class of ’98,” Deal, Aug. 1, 2003.
18 The carnage extended: David Carey, “AMF Rolls a Gutter Ball,” Deal, July 3, 2001.
19 Meanwhile, KKR: David Carey, “Regal Cinemas Near Prepackaged Bankruptcy,” Deal, Jan. 12, 2001.
20 Sixty-two major private equity–backed companies: David Carey, “Older, but How Much Wiser?” Deal, Dec. 6, 2001; David Carey, “Bust-Up Update,” Deal, Aug. 8, 2002.
21 Blackstone narrowly escaped: Chad Pike interview.
22 By 2002, the default rate: Edward Altman, New York University Stern School of Business, “Review of the High Yield and Distress Debt Markets,” presentation at Boston College Center for Asset Management Conference, June 5, 2009.
23 From the summer of 2000: PPM for BCP V.
Chapter 15: Ahead of the Curve
1 At the time, it looked: Stephen Schwarzman interview.
2 “When you look at distressed deals”: Chinh Chu interview.
3 “We’re value investors and we’re pretty agnostic”: Schwarzman interview.
4 Blackstone tested its new strategy: Lawrence Guffey and Arthur Newman interviews.
5 “At that point, cable”: Schwarzman and Guffey interviews.
6 Together with its coinvestors … Adelphia and Charter yielded: Summary in PPM for BCP V; William Obenshain interview, Feb. 29, 2009; Guffey interview.
7 The communication fund: PPM for BCP VI.
8 When Blackstone took a minority stake: John E. Morris and David Carey, “DLJ, Blackstone Cash In on Nycomed,” Deal, Mar. 10, 2005.
9 Likewise, the financing … TRW Automotive: Neil Simpkins interview; Kelly Holman and Lou Whiteman, “Blackstone Inks TRW Auto Deal,” Deal, Nov. 19, 2002.
10 In another instance, Blackstone: Lou Whiteman, “PMI Leads Buyout of GE Unit,” Deal, Aug. 4, 2003.
Chapter 16: Help Wanted
1 Between 1996 and 2000: Blackstone (employee count).
2 For all intents and purposes: Stephen Schwarzman interview; Howard Lipson interview, May 29, 2008.
3 Lee was at the very top: Robert Lenzner, “Meet the New Michael Milken,” Forbes, Apr. 17, 2000.
4 Yet within weeks of Lee’s: Robert Clow, “Jimmy Lee Banks Again—To Hunt M&A in His Own, Separate Shop at Chase,” New York Post, Nov. 7, 2000; Erica Copulsky, “At Chase Manhattan, a Study in Contrasts,” Deal, May 31, 2000; Laura M. Holson, “Chase’s Investment Banking Hopes Ride on a Goldman Exile,” NYT, June 29, 2000.
5 “At the defining moments”: Bret Pearlman interview, Feb. 11, 2009.
6 Lee, who had spent … “Jimmy’s an exceptionally loyal person”: Schwarzman interview; James Lee interview, Oct. 17, 2008.
7 An executive recruiter: Schwarzman interview.
8 On paper, James: IPO Prospectus, 193–94.
9 When Schwarzman reached out: Massachusetts Pension Reserves Investment Board, list of private equity partnerships and internal rates of return as of Dec. 31, 2003, provided by fax on Aug
. 25, 2004, in response to query (DLJ Merchant Banking); California State Teachers’ Retirement System, Statement of Investments as of June 30, 2002, provided by fax on Dec. 13, 2002, in response to query (Blackstone Capital Partners II).
10 “He wasn’t running”: Sabin Streeter interview, Feb. 25, 2009; background interviews with three former DLJ bankers.
11 When a new CEO: Andrew Ross Sorkin and Patrick McGeehan, “First Boston Plans a Shakeup in Its Banking Unit,” NYT, Feb. 19, 2002; Landon Thomas Jr., “The New Color of Money,” New York, May 27, 2002; Erica Copulsky, “CSFB Big Gun James Jumps to Blackstone,” New York Post, Oct. 18, 2002; background interviews with two ex-CSFB sources.
12 To Schwarzman, James possessed … ahead of schedule in early November: The account of the discussions and their thoughts is based on Schwarzman and Tony James interviews; personal details verified by James; summary of personality from authors’ observations and interviews.
13 Friends say that James: Background interviews.
14 James wasted no time: Pearlman interview.
15 His mandate from Schwarzman: James interview; David Carey, “Stirring the Pot at Blackstone,” Deal, Aug. 8, 2003.
16 He also pressed partners: James interview.
17 James hammered home: Lawrence Guffey interview.
18 “Eight train tracks ran”: Chinh Chu interview.
19 It came as no surprise: Materials for an offsite meeting of Blackstone’s private equity group, vol. 1, pt. II, 56, Apr. 21, 2006.
20 James also reexamined: James interview.
21 “Tony said, ‘We’re not’ ”: Background interview with a leveraged-finance banker.
22 “we were run”: Chad Pike interview.
23 “This was not Tony [coming]”: Schwarzman interview.
24 Some partners were anxious: Two background interviews.
25 Mossman was the person: Three background interviews.
26 “Before, everyone had their own relationship”: Lipson interview.
27 For Bret Pearlman and Mark Gallogly: Matthew Craft, “Elevation Partners Raises $1.8B Fund,” Corporate Financing Week, July 1, 2005; Henny Sender, “Centerbridge over Troubled Waters: New Fund Mixes Buyouts, Bad Debt,” WSJ, Dec. 15, 2006.
28 “He’s pretty self-aware”: Background interview with a leveraged-finance banker.
Chapter 17: Good Chemistry, Perfect Timing
1 As they sized up each other: Stephen Schwarzman and Tony James interviews.
2 Theirs was a contrarian view: Mario Giannini interview, Feb. 13, 2009.
3 “We got very active”: James interview; Dealogic data compiled for the authors on May 7, 2009.
4 The first big cyclical play: Neil Simpkins interview.
5 Chu had followed: Chinh Chu interviews and written response to query.
6 When Chu first began … back on track: Chu interviews; Celanese financials. Quotes and thoughts attributed to Chu in this chapter are based on interviews with him.
7 “It did take some time”: David Weidman, written response to query, mid-2009.
8 Scaring up the equity: Chu interview.
9 In December 2003: Chu interview; Blackstone press release, Dec. 16, 2003. The 2.8 billion ($3.4 billion) deal value excludes pension liabilities.
10 The next morning: Blackstone press release, Mar. 30, 2004; Celanese press releases of Aug. 3, 2004, Aug. 19, 2005, and Dec. 22, 2006.
11 The problem was exacerbated: Chu interview.
12 The move to Dallas saved: Chu interview.
13 Two months after the dividend: Form S-1, Celanese Corp., Nov. 3, 2004, and Form 424B4, Celanese, Jan. 24, 2005; PPM for BCP V.
14 By the time they sold: Blackstone recorded a $2.9 billion gain on BCP IV’s $405.6 million investment in Celanese.
15 By Chu’s reckoning … on Blackstone’s watch: Chu interview and written response to fact-checking queries (source of profits and employee count); BASF, Dow Chemical, and Eastman Chemical financial reports (comparative cash flows); Celanese financials (productivity).
16 The economic slowdown: David Weidman, written response to query, mid-2009.
17 The Nalco investment: PPM for BCP V.
18 “You’ve got to have”: Chu interview.
19 It was a lesson: Schedule 14A, TRW Automotive Holdings Corp., Apr. 3, 2009 (Blackstone’s remaining stake); TRW press release, Mar. 1, 2010 (stock sale).
Chapter 18: Cash Out, Ante Up Again
1 The mood shift: Dealogic data compiled for the authors on Apr. 7, 2009.
2 The high-yield bond market: Dealogic data compiled for the authors on Apr. 7, 2009.
3 That’s what happened with Nalco: Nalco financials; background interview with a source involved in the buyout.
4 Still, there had never before been: Vyvyan Tenorio, “The Dividend Debate,” Deal, Apr. 16, 2009; press reports on bond spreads.
5 The secondary buyouts: John E. Morris, “Sealy Hops from Bain to KKR,” Deal, Mar. 4, 2005.
6 Nevertheless, Simmons’s three other: David Carey, “How Many Times Can You Flip This Mattress?” Deal, Jan. 23, 2004. A lengthy NYT story about Simmons’s bankruptcy in 2009 stressed how debt had increased through the successive buyouts but nowhere mentioned the simultaneous rise in cash flow or the growth of the business: Julie Creswell, “Profits for Buyout Firms as Company Debt Soared,” NYT, Oct. 5, 2009.
7 Even though Sealy’s growth: Sealy financials; Morris, “Sealy Hops from Bain to KKR.”
8 Blackstone’s buyout funds: Blackstone; Carlyle press release, Feb. 14, 2005 (2004 payouts); Amendment No. 6, S-1A, KKR & Co., LP, Oct. 31, 2008, 232; Nathalie Boschat, “Carlyle and Blackstone in Record Payouts,” Financial News, Jan. 27, 2006 (Carlyle 2005 payouts). KKR had more buyout capital under management in the late 1990s and early 2000s than Blackstone and hence had more investments to exit in this period. Carlyle’s figures include venture capital, real estate, and mezzanine debt funds. Blackstone’s figures do not include its real estate funds.
9 By the end of 2005: California Public Employees Retirement System, AIM Program Fund Performance Review (hereafter CalPERS Fund Report) as of Dec. 31, 2005 (Apollo 2001 fund: 39.8 percent; Blackstone 2002 fund: 70.8 percent; TPG 2003 fund: 41.8 percent); Washington State Investment Board, Portfolio Overview by Strategy, Dec. 31, 2005 (KKR 2002 fund: 50.5 percent). Beginning in the early 2000s many state pension funds were required to disclose returns on individual private equity and venture capital funds in which they had invested, making the returns a matter of public record for the first time.
10 Blackstone’s 2002 fund: CalPERS Fund Report as of Dec. 31, 2008; Oregon Public Employees’ Retirement Fund, Alternative Equity Portfolio as of Mar. 31, 2009.
11 By the late 1990s, banks: Center for Private Equity and Entrepreneurship, Tuck School of Business at Dartmouth, Note on Private Equity Asset Allocation, Case #5-0015, updated Aug. 18, 2003 (hereafter Note on Allocation), 14.
12 The typical pension fund: 2009 Wilshire Report on State Retirement Systems: Funding Levels and Asset Allocations, Wilshire Associates, Inc., 11–12; Note on Allocation, 2–3.
13 Giant pensions: Ibid., 1; CalPERS Fund Report as of Dec. 31, 2005.
14 Between 2003 and 2008: 2009 Wilshire Report on State Retirement Systems, 11.
15 But those whose profits: Heino Meerkatt, John Rose, Michael Brig, Heinrich Liechenstein, M. Julia Prats, and Alejandro Herrerra, The Advantage of Persistence—How the Best Private Equity Firms “Beat the Fade,” Boston Consulting Group and the IESE Business School of the University of Navarra, Navarra, Spain, Feb. 2008; Note on Allocation, 12.
16 As a consequence: Conor Kehoe and Robert N. Palter, “The Future of Private Equity,” McKinsey Quarterly 31 (Spring 2009): 15.
17 From the low ebb: National Venture Capital Association/Thomson Financial press release, Jan. 16, 2007.
18 The industry wasn’t as concentrated: Kehoe and Palter, “The Future of Private Equity,” 15. In 2006 the U.S. Department of Justice launched an investigation of poss
ible collusion among big private equity firms. Later, some shareholders of buyout targets brought an antitrust suit against most of the largest private equity firms, charging that they agreed not to bid against each other in several major corporate auctions. As of early 2010, nothing had come of the government investigation, and the evidence in the civil suit was under seal, so no public evidence of collusion had been revealed. Peter Lattman, “ ‘Club’ Suit Dogs Buyout Firms,” WSJ, Mar. 9, 2010.
19 In the previous decade … Private equity’s share: Dealogic data compiled for the authors on May 28, 2009.
Chapter 19: Wanted: Public Investors
1 Leon Black’s Apollo Management: N-2, Apollo Capital Corp., Feb. 6, 2004. The company was renamed Apollo Investment Corporation before it went public.
2 When Apollo said in early April: Vipal Monga, “Blackstone Locks Up BDC Market,” Deal, May 19, 2004.
3 It was “the pack moving”: Background interview.
4 As things played out: Vipal Monga, “This Goose Is Cooked,” Deal, Oct. 1, 2004.
5 “The golden goose”: Ibid.
6 In March 2005: Jonathan Braude, “Ripplewood Stock Rises,” Deal, Mar. 24, 2006.
7 In early 2006: “KKR Starts Roadshow for $1.5bln Listing—source,” Reuters, Apr. 19, 2006.
8 “There were twenty other”: Michael Klein interview, Nov. 14, 2008; background interview with an adviser on several offerings.
9 At the original $1.5 billion: Stephen Schwarzman interview.
10 Competitors soon found: Schwarzman and Klein interviews.
11 There were mixed emotions: Edward Pick interview, Oct. 22, 2008.
12 The lesson: Schwarzman interview.
Chapter 20: Too Good to Be True
1 For Chinh Chu: Chinh Chu interview.
2 The $2.6 billion in gains: Calculations based on figures in PPM for BCP V.
3 “The debt [offered] on that deal”: Chu interview.
4 After peaking that year: Tronox annual report for 2007.
5 At $11.3 billion: David Carey, “Silver Lake Leads SunGard Buyout,” Deal, Mar. 28, 2005.
6 The Sarbanes-Oxley law: Daniel Rosenberg, “Sarbanes-Oxley Slows IPO Rush in Boom to Private-Equity Funds,” WSJ, Mar. 31, 2005.
King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone Page 39