36 “The game on a deal”: Schwarzman interview.
37 Harry Macklowe: Jennifer S. Forsyth, “Real-Estate Credit Crisis Squeezes Macklowe,” WSJ, Feb. 1, 2008.
38 The fallout from EOP: Charles V. Bagli, “Property Deal of the Century Leaves Buyers Underwater,” NYT, Feb. 8, 2009; Dan Levy, “Morgan Stanley to Give Up 5 San Francisco Towers Bought at Peak,” Bloomberg News, Dec. 17, 2009; Charles V. Bagli, “Buying Landmarks? Easy. Keeping Them? Maybe Not,” NYT, Jan. 16, 2010.
39 But with office rents falling: Charles V. Bagli, “Market’s Troubles Echo in a Building’s Vacant Floors,” NYT, Nov. 10, 2008.
40 It also had another scare: Chad Pike interview.
41 Even so, the recession: Peter Lattman and Lingling Wei, “Blackstone Reaches Deal to Revamp Hilton’s Debt,” WSJ, Feb. 20, 2010; Hilton Worldwide press release, Apr. 8, 2010.
42 On top of the slump: “Federal Prosecutors Consider Charges in Probe of Hilton Hotels,” Associated Press, in Washington Post, Feb. 20, 2010.
Chapter 25: Value Builders or Quick-Buck Artists?
1 In “Buy It, Strip It”: David Henry and Emily Thornton, with David Kiley, Aug. 7, 2006.
2 Hertz was a classic case: This section is based on Hertz’s financial reports, an in-depth government study of the buyout, and two lengthy business school case studies based on it: Private Equity—Recent Growth in Leveraged Buyouts Exposed Risks That Warrant Continued Attention, Government Accountability Office Report GAO-08-885, Appendix VI, Sept. 2008; Bidding for Hertz: Leveraged Buyout and Investing in Sponsor-Backed IPOs: The Case of Hertz, University of Virginia, Darden Business Publishing, Charlottesville, Case Studies UVA-F-1560 and UVA-F-1561, both revised Apr. 17, 2009.
3 In a study of 4,701 IPOs: Oliver Gottschlag, Private Equity and Leveraged Buyouts, commissioned by the European Parliament, Nov. 2007, http://www.buyoutresearch.org.
4 Academic studies also debunk: In a recent book, the authors’ friend and former colleague, Josh Kosman, argues that private equity firms damage the companies they own and harm the economy more generally: Josh Kosman, The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis (New York: Penguin, 2009). However, he mis-characterizes the conclusions of some of the studies cited here, including the findings about the impact of buyouts on jobs. As is clear, we disagree with his broader conclusions.
5 The most exhaustive survey: The Globalization of Alternative Investments Working Papers Volume I: The Global Economic Impact of Private Equity (Cologny/Geneva and New York: World Economic Forum, 2008) (“WEF study”). The findings on hirings and layoffs are in a report by Steven J. Davis, Josh Lerner, John Haltiwanger, et al., “Private Equity and Employment,” 43–64. The entire WEF study is available online at http://www.weforum.org/en/media/publications/privateequityreports/index.htm.
6 As for quick flips, there are relatively few: WEF study. Findings on private equity holding periods are in a report by Per Strömberg included in the WEF study, “The New Demography of Private Equity,” 3–26. The author analyzed more than 21,397 leveraged buyouts from 1970 to 2007.
Findings on research and development spending are in another report included in the WEF study, by Josh Lerner, Per Strömberg, and Morten Sorensen, “Private Equity and Long-Run Investment: The Case of Innovation,” 27–42. The authors examined 495 private equity–owned companies worldwide.
7 There are risks, of course: WEF study. Findings on default rates are in the Strömberg report, 3–26. Strömberg derives the annual default rate for private equity–owned companies from his own research into 21,397 buyouts. The rate he gives for all companies that sold bonds came from a January 2006 Special Comment by Moody’s Investors Service, Default and Recovery Rates of Corporate Bond Issuers (1920–2005).
A July 2008 study by the Bank for International Settlements, Committee on the Global Financial System Paper No. 30, Private Equity and Leveraged Finance Markets, similarly concludes that only a small fraction of private equity–owned businesses default, though the BIS’s figures are higher than Strömberg’s rate of 1.2 percent, ranging from 2.13 percent to 3.84 percent for four separate periods from 1982 to 2001.
8 Another study by the credit-rating agency: In a survey of 220 private equity–backed companies, only 1.1 percent defaulted between 2002 and 2007, compared with the 3.4 percent default rate on high-yield bonds generally over the same period. Private Equity: Tracking the Largest Sponsors, Moody’s Investors Service, Jan. 2008, 5.
9 The latest recession, which has seen defaults spike: Few studies to date have looked into defaults tied to the post-2007 financial crisis and recession. One such study was conducted by the Private Equity Council, a Washington, D.C.–based private equity trade group. In a March 2010 press release, the PEC put the annual default rate in 2008 and 2009 at just 2.8 percent for the more than 3,200 private equity–owned companies in its sample, all acquired since 2000. That compared with a 6.2 percent rate for similarly leveraged businesses that weren’t private equity–owned, the PEC said.
The latest default numbers from Moody’s and another credit rating agency, Standard and Poor’s, are higher than the PEC’s, but the agencies employ a much broader definition of default. Moody’s, for instance, says in a November 2009 Special Comment, $640 Billion & 640 Days Later, that fully 19.4 percent of companies owned by America’s fourteen largest private equity firms defaulted from January 2008 to September 2009. Moody’s, however, counts as a default not just companies that have not missed an interest payment or violated a covenant but also those that have restructured some of their debt or have exchanged new debt for existing debt that was trading at a steep discount. Many private equity firms and their companies took advantage of the panic in the debt markets in 2008 and 2009 by offering to trade old debt at a fraction of its face value for new debt with more security and/or longer maturities. That reduced the companies’ debt loads and put them on firmer footing, yet it counted as a default in Moody’s statistics.
10 “The bulk of the money”: Background interview.
11 The European Parliament’s study: Gottschlag, Private Equity and Leveraged Buyouts.
12 A more detailed study: Heino Meerkatt, Michael Brigl, John Rose, et al., 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.
13 In an internal analysis: Materials for an offsite meeting of Blackstone’s private equity group, volume 1, part II, 27, Apr. 21, 2006.
14 Some of the credit: Lionel Assant interview; Axel Herberg interview, Nov. 10, 2008; background interview with another person familiar with the company.
15 Gerresheimer’s CEO, Axel Herberg: Herberg interview.
16 The Investcorp partner: Herberg interview; background interview with another person familiar with the company.
17 Herberg met with Tony James: Assant and Herberg interviews.
18 Herberg’s goal: Assant and Herberg interviews.
19 In one final, dramatic stroke: Herberg interview; preliminary International Offering Circular, Gerresheimer, May 25, 2007, obtained from the company; Gerresheimer press release, July 30, 2007.
20 The IPO, which raised: Preliminary International Offering Circular; Gerresheimer press release, June 8, 2007.
21 Having run the business: Herberg interview. Herberg resigned as CEO in 2010 to join Blackstone as a partner.
22 With Merlin Entertainments … Merlin planned an IPO: This section is based on an interview with Nick Varney on Nov. 3, 2008, and a subsequent interview with Joe Baratta. Revenue and Ebitda growth figures, as well as details of the company’s history, come in part from the company’s web site. Investment figures and ownership stakes come from the press releases for Merlin’s acquisitions and from Blackstone. The profit calculation is the authors’.
23 In an era when lean … Since Blackstone recovered: Information and quotations come from the following: Jeffrey Clarke interview, Aug.
27, 2009; Paul Schorr IV and Patrick Bourke joint interview; Henry Silverman interview, May 13, 2008; Travelport Ltd.’s Form S-4, May 8, 2007; Orbitz Worldwide Inc.’s IPO Prospectus (Form 424B4), July 20, 2007; company financials for Travelport Ltd., Travelport LLC, and Orbitz Worldwide Inc.; and news reports.
24 If Blackstone had sold: Estimates of gains are the authors’, based on Travelport’s results and market valuations of similar companies.
25 Under private equity: The same conclusion was reached in a recent study. Heino Meerkatt and Heinrich Liechenstein, Time to Engage or Fade Away: What All Owners Should Learn from the Shakeout in Private Equity, Boston Consulting Group and the IESE Business School of the University of Navarra, Navarra, Spain, Feb. 2010.
On a related corporate governance issue, another study found that directors who have served on the boards of both public and private equity–owned companies say the latter are much more effective. Viral Acharya, Conor Kehoe, and Michael Reyner, “The Voice of Experience: Public Versus Private Equity,” McKinsey Quarterly (Dec. 2008).
26 The contrast between public-company: David Carey, “Deliver and You Get Paid,” Deal, June 4, 2007; Gerry Hansell, Lars-Uwe Luther, Frank Plaschke, et al., Fixing What’s Wrong with Executive Compensation, Boston Consulting Group, June 2009 (“Learning from Private Equity,” 5).
Chapter 26: Follow the Money
1 The competitive landscape: Christine Alesci, “Fortress’ $5 Billion Buyout Loss Haunts Eden as Black Has Gain,” Bloomberg News, June 16, 2010. By the spring of 2010, Apollo said that its 2006 fund was showing a profit because Apollo’s distressed debt investments had fared so well. Apollo Global Management, Amendment 4 to S-1, Mar. 22, 2010, 118.
2 Notwithstanding the risks: Hugh MacArthur, Graham Elton, Bill Halloran, et al., Global Private Equity Report 2010, Bain & Co., Mar. 10, 2010, 14; CalPERS Comprehensive Annual Financial Report—Fiscal Year Ended June 30, 2009, 85; CalSTRS Comprehensive Annual Financial Report—2009 (fiscal year ended June 30, 2009), 69. Unlike the stock and bond returns, which are based on the prices at which those assets are traded, the private equity returns are based on the so-called mark-to-market values the firms put on their investments, so they amount to self-appraisals. Accounting rules require that firms justify those values by reference to public company valuations, transactions involving comparable companies, or some other legitimate basis, but it won’t be clear how accurate the valuations—and hence the returns—are until the investments are sold. In one case, Stiefel Laboratories, Inc., discussed below, Blackstone undervalued the company and sold it at a price well above that marked-down valuation.
3 Even without new contributions: MacArthur, Elton, Halloran, et al., Global Private Equity Report 2010, 20 ($508 billion estimate); Heino Meerkatt and Heinrich Liechenstein, Driving the Shakeout in Private Equity, Boston Consulting Group and the IESE Business School of the University of Navarra, Navarra, Spain, July 2009 ($550 billion); Conor Kehoe and Robert N. Palter, “The Future of Private Equity,” McKinsey Quarterly 31 (Spring 2009), 11 ($470 billion).
4 Apollo, which made its name: Christine Idzelis, “PAI Cedes Control of Monier to Senior Lenders,” Deal, July 7, 2009; David Elman, “Aleris Files Reorg Plan,” Deal, Feb. 10, 2010; Eduard Gismatullin, “Gala Coral Refinancing to Cut Debt 29 Percent to $2.8 Billion,” Bloomberg News, Mar. 13, 2010.
5 But the vulture game: Anousha Sakoui, “Vulture Fund Takeover of Countrywide Was More Than Picking the Bones,” Financial Times, Feb. 19, 2010.
6 After looking at more than forty: Chinh Chu interview (forty instititutions); Zachery Kouwe, “Regulators Seize and Sell Florida’s Biggest Regional Bank,” NYT, May 21, 2009.
7 Late in 2009, Blackstone: Anheuser-Busch-InBev/Blackstone press release, Oct. 7, 2009; Blackstone press release, Nov. 19, 2009; British Land press release, Sept. 18, 2009; Glimcher Realty Trust/Blackstone press release, Nov. 5, 2009.
8 GlaxoSmithKline paid $3.6 billion: GlaxoSmithKline/Stiefel press release, Apr. 20, 2009; Suntory press release, Sept. 24, 2009.
9 Kosmos Energy: “Kosmos Confirms Sale of Oil Stake,” Bloomberg News, Oct. 12, 2009. The sale to Exxon-Mobil Corp. was delayed, however, because of objections from the government of Ghana.
10 Vanguard Health Systems: Vanguard report for the quarter ended Dec. 31, 2009, Feb. 9, 2010, 32.
11 Astonishingly, HCA, Inc.: HCA press release, Feb. 18, 2010.
12 After two years of knocking: Blackstone earnings conference call, July 22, 2010, available on FactSet.
13 In 2009, when private: CalPERS press release, June 15, 2009 (allocation raised to 14 percent from 10 percent); Keenan Skelly, “Calstrs Raises Target Allocation to 12%,” LBO Wire, Aug. 17, 2009; e-mail from Robert Whalen, press officer for New York State Comptroller Thomas P. DiNapoli (confirming unannounced increase from 8 percent to 10 percent in late 2009), Mar. 8, 2010. In part, the changes were made to keep the funds in line with their own targets, so they were not forced to sell private equity stakes at a discount in the secondary market to bring their allocations into alignment.
14 Buyouts in 1991 and 1992: Blackstone Annual Report, 2008, 4–5.
15 “All of these large buyout firms”: David Rubenstein interview, July 7, 2008.
16 But predictions of catastrophic waves: Martin Fridson, “ ‘Refi Tidal Wave’ Unlikely to Spur Massive Defaults,” Standard & Poor’s / Leveraged Commentary & Data, June 8, 2009. Cf. Josh Kosman, The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis (New York: Penguin, 2009).
17 By the spring of 2010: E-mail from Robert Friedman, Blackstone’s general counsel, Mar. 31, 2010, in response to a query.
18 Some of the biggest competitors: Anton Troianovski and Lingling Wei, “Morgan Stanley Property Fund Faces $5.4 Billion Loss,” Wall Street Journal, Apr. 14, 2010; Henny Sender, “Goldman Fund Down to $30M,” Financial Times, Apr. 16, 2010.
19 By 2010, it had participated: Peter Lattman, “Soccer Deal Gives KKR a Kick,” Wall Street Journal, Jan. 13, 2010; David Carey, “Don’t Use the ‘D’ Word,” Deal, June 22, 2009.
20 “If we don’t reinvent ourselves”: Prakash Melwani interview; saying confirmed with Schwarzman.
ABOUT THE AUTHORS
David Carey is a senior writer at The Deal, a New York–based news service and magazine covering private equity and mergers and acquisitions. He has reported on private equity for twenty years. Before joining The Deal in 1999, he was the editor of Corporate Finance magazine and wrote for Adweek, Fortune, Institutional Investor, and Financial World. He holds two master’s degrees: one in French literature from Princeton and a second in journalism from Columbia. He earned his bachelor’s degree at the University of Washington.
John E. Morris is an editor with Dow Jones Investment Banker, a news and commentary service. Before that, he was assistant managing editor of The Deal in London and New York, where he oversaw its private equity coverage. From 1993 to 1999 he was editor and editor at large at The American Lawyer magazine. He earned his undergraduate degree at the University of California, Berkeley, and a J.D. from Harvard. He practiced law in San Francisco for six years before becoming a journalist.
King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone Page 41