The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything (Bloomberg)

by Jason Kelly

  He reflected on what it means to be the ultimate owner of dozens of companies that people know and use every day, noting that it fundamentally alters how people inside the firm think about what they do, even him. “When you own the world’s largest hotel chain, that changes things,” he said.

  Schwarzman may be working hard to bulk up the bench, but his is a slow, noisy fade, just as it is and presumably will be for his biggest competitors. He has built a firm beneath him that allows him to press Blackstone’s advantage. That means thinking about his biggest customers, staying ahead of the competition, and spending most of his time away from Park Avenue. Those billions aren’t going to raise themselves.

  Schwarzman has a habit of getting on a roll, oblivious to time constraints or schedules. But when he’s done, he’s done, and moving on to whatever is next. That was the case this day, when he finally realized his wife was waiting for him to celebrate his birthday. After dinner there would inevitably be calls to return to New York, as headquarters finished up its workday. When that was done, Asia would be waking up. He stood up and soon I was left staring at an empty chair.

  I descended from the Blackstone offices down to Park Avenue. Somewhere in midtown, David Rubenstein was likely regaling a would-be owner of his stock about the virtues of Carlyle’s impending public offering and his vision for Carlyle’s continued growth. Kravis, fresh from a trip to the Middle East and Asia, was preparing a presentation to his own shareholders about Capstone and the specific levers KKR had pulled at the likes of beer purveyor Oriental Brewery and pill maker Capsugel. Coulter was adapting the speech he gave in Scottsdale as a state of the union of sorts for the industry’s annual Super Return conference in Berlin.

  They were all making their case, each with more than a passing glance at the other’s strategy, and with an eye trained on their ultimate legacy as firms and as an industry. All this with more pressure from investors to perform, combined with the weight of their own ever bigger, ever more costly organizations. They had to keep the money coming in, keep buying, and keep building ever-growing empires.

  Notes

  1. Michael De la Merced and Peter Lattman, “Warburg Stays in the Fray, but off the Public Market,” New York Times Dealbook, August 17, 2011. http://dealbook.nytimes.com/2011/08/17/warburg-stays-in-fray-but-off-public-market/?partner=Bloomberg

  2. Nelson D. Schwartz, “Wall Street’s Man of the Moment,” Fortune, March 3, 2007. http://money.cnn.com/magazines/fortune/fortune_archive/2007/03/05/8401261/

  Afterword

  Almost a year to the day after visiting Legoland, I was walking with my wife and sons down a stretch of Broadway, just above Columbus Circle in Manhattan. We’d just spent the afternoon at the American Museum of Natural History looking at dinosaur bones and learning about the solar system. Now we were headed for dinner and I was pointing out various sites of personal significance—where their uncle had gone to law school; an outpost of my favorite burger place; the spot where the Big Apple Circus sets up every year. And there on Broadway, just north of West 62nd Street, was an entrance to the David Rubenstein Atrium at Lincoln Center. I pointed. My wife just shook her head.

  Through the course of reporting and writing this book, I became even more annoying than usual to those around me, as I constantly discovered more evidence of private-equity ubiquity. I mused whether Blackstone and Bain pushed the Weather Channel to improve its iPad app. I wondered whether the private-equity owners had any say in casting Will Arnett for the commercials for Hulu that ran during the Super Bowl. At one person’s suggestion, I briefly considered living for a week or month using only private-equity products, a sort of Supersize Me, private-equity style. Thankfully for my family, I chose not to.

  As a journalist, I’m trained to look for the surprise. The omnipresence of this industry did in fact surprise me, even as it was a major premise of the book and a business I’d been reporting on for years. I began to realize that companies that weren’t owned by private-equity firms could someday be, or that some enterprising analyst tucked in a windowless cubicle at Blackstone or KKR probably built an Excel spreadsheet about it. Somewhere, someone has run the numbers. Even in a subdued, post-LBO boom age, it seemed there was nothing they couldn’t buy at least a piece of.

  The intense focus on personal legacy on the part of the founders also surprised me, though maybe it shouldn’t have. After all, men in their sixties and seventies are prone to think a lot about what they’ve done and what they’ve left to do, especially when their names are literally or figuratively on the door. They’ve made more money than most of them could have ever imagined. Now it’s about going out a hero, or at least leaving something meaningful behind, as businessmen and as people.

  Rubenstein’s name jutting out from that building on Broadway made me think of the most prominent local monument to private-equity wealth and largesse, the Stephen A. Schwarzman Building. The Main Branch of the New York Public Library had been a frequent writing spot for me. It’s an iconic and beautiful artifice, situated on a parcel of land in the heart of Manhattan adjacent to Bryant Park, where New Yorkers can ice skate in the winter and enjoy picnics while watching outdoor movies in the summer.

  One afternoon, while I was deep in the throes of book research, I was walking up the stairs of the Schwarzman library behind some tourists, one of whom was wearing a Jack Wolfskin jacket. The apparel maker is owned by Blackstone. Resisting the temptation to point out the connection to the unsuspecting visitor, I proceeded to find a spot to plug in my laptop. The main reading room where I typically worked is awe-inspiring and appropriately quiet, the silence punctuated only by chairs being pushed and pulled on the tile floor and the vibration of mobile phones. I spent many hours there, writing about Schwarzman and his competitors in the building that is his monument.

  Lest you forget it’s his, Schwarzman’s name is peppered throughout the library, on placards providing directions, and also inscribed on the ground just outside the main revolving door. In the lobby, there are other names inscribed in stone, names like Astor. The private equity barons are, truly, the new tycoons.

  With this much money and this many people involved, the big questions loom and there aren’t any easy answers. I can’t give an unqualified endorsement of private equity as an industry or as a practice. Nor can I condemn it as across-the-board destructive. One person inside the industry told me along the way that private equity isn’t good or bad—it just is.

  Anyone who directly has say over that much money and can so deeply impact millions of lives has a big responsibility. Such people can’t be judged solely on how much money they make for their investors or themselves. And they can’t even be judged simply on how many jobs they create or destroy.

  The institutions that give these men all that money share their burden. Even with their desperate need for the investment returns private equity promises to deliver, those big organizations—especially public pension funds—continue to influence how private-equity managers earn their rich rewards. The best managers will have to demonstrate with hard numbers that they are, on balance, improving the companies they buy for the long term.

  And that’s where it will ultimately matter to all of us. My kids don’t especially care who David Rubenstein is, though maybe someday they’ll enjoy Lincoln Center or marvel at the Magna Carta. Maybe they’ll study in the Schwarzman library or enjoy the art in the Henry R. Kravis wing of the Metropolitan Museum of Art. Maybe one day they’ll rely on investments made by KKR, Carlyle, or Blackstone for their retirement savings. In the meantime, my boys are ready to tell me what they want from Dunkin’ Donuts.

  Acknowledgments

  The roots of this book extend back to February 2007, Groundhog Day to be exact, when the editors at Bloomberg News asked me to take a new assignment in New York. The intervening period was far from the same day over and over again, as that five-year stretch saw the crest of the biggest boom in leveraged buyouts and the biggest crash. It’s an amazing beat to cover and I remain grat
eful for the opportunity.

  The book wouldn’t be possible without the vision of Evan Burton at John Wiley & Sons, who planted the seed and then helped me run with the idea. Emilie Herman kept me sane throughout the writing and editing process and Donna Martone shepherded it through production.

  A huge number of people within Bloomberg News lent invaluable support and counsel, beginning with editor-in-chief, Matt Winkler. I’m grateful to Dan Doctoroff, Bloomberg LP’s president and chief executive officer, for his encouragement. Reto Gregori believed in this project from the start, and encouraged me throughout, as did Dan Hertzberg, Rob Urban, Otis Bilodeau, Katherine Snyder, Cesca Antonelli, Karen Toulon, Jennifer Sondag, Tom Contiliano and Marybeth Sandell. Josh Tyrangiel, Bryant Urstadt, and Cynthia Hoffman were instrumental in a 2011 Bloomberg Businessweek story on TPG that helped lay the groundwork for the book.

  Norm Pearlstine, Ben Cheever, Wendy Naugle, and Gwyneth Ketterer provided invaluable input throughout the writing process that made the final product better.

  The U.S. Investing team, whose New York branch is known unofficially as “the Bayou,” is a group whose talent and humanity run deep, and I’m especially indebted to Katherine Burton, Saijel Kishan, and Christian Baumgaertel. Larry Edelman, our managing editor, has looked out for me since my first day covering private equity. Cristina Alesci, who was there when the idea was born, has been a great partner on the beat. Devin Banerjee and Sabrina Willmer bravely stepped into the breach so I could pursue this project.

  I drew journalistic and moral fortitude from many other colleagues, past and present, including Deirdre Bolton, Jeff McCracken, Mary Jane Credeur, Laura Marcinek, Allison Bennett, Jim Aley, Laura Chapman, Ian King, Beth Jinks, Sharon Lynch, Bob Ivry, Lisa Kassenaar, Robin Wood, David Scheer, Serena Saitto, Zach Mider, Adam Levy, Liz Hester, Jane Seagrave, Jonathan Keehner, Dick Keil, Nora Zimmett, Emma Moody, and Anne-Sylvaine Chassany.

  I was granted generous access to firms described in this book, and there were a number of people who put up with a constant barrage of phone calls, e-mails, and visits: Kristi Huller, Peter Rose, Christine Anderson, Chris Ullman, Randy Whitestone, Adam Levine, Tom Franco, Brian Marchiony, Jennifer Zuccarelli, Mary Winn Gordon, Owen Blicksilver, Alex Stanton, Duncan King, Melissa Daly, Ellen Gonda, Suzanne Fleming, and Brooke Gordon. Marshall Mays, Kathy Daw, Lindsey Poff, and Aaron Nagler showed extraordinary patience with me in navigating schedules and locations.

  For my personal sanity, I’m grateful to the running club that gathers weekly at Sleepy Hollow High School, especially to Beth Loffredo, who has logged hundreds of miles with me and my neuroses. Kendra and Billy Robins were gracious hosts during my travels west. And there were people and institutions that helped me unwittingly. The Ossining Public Library and the New York Public Library lent picturesque writing spots, while the Drive-by Truckers and R.E.M. provided a daily writing soundtrack.

  I come from a sprawling Southern family that’s a source of unwavering encouragement. My parents, Dennis and Debby Kelly, nurtured in me a curiosity about business and an appreciation for creativity that led me to become a financial journalist. My brothers Wynne and Sam are my sounding boards and role models, regardless of where in the world they happen to be. Alice and Jack Kane have a knack for knowing I need them, often before I do.

  My sons Owen, William, and Henry, are my proudest accomplishments and constant sources of humor and perspective. My deepest gratitude is reserved for my wife, Jennifer. Her love, patience, and intelligence defy description.

  J.K.

  About the Author

  Jason Kelly is a writer with Bloomberg News based in New York who covers the global private equity industry. During his 10 years with Bloomberg, he’s also followed the technology industry and written about issues ranging from the aftermath of Hurricane Katrina to economic development during the war in Afghanistan. He’s a frequent contributor to Bloomberg Television and Bloomberg Businessweek. Prior to joining Bloomberg, he was the editor-in-chief of digitalsouth magazine, a publication focused on technology and finance in the Southeast and Texas. Jason started his journalism career at the Atlanta Journal-Constitution and the Atlanta Business Chronicle. He earned a bachelor’s degree from Georgetown University. Jason lives in Sleepy Hollow, New York, with his wife, Jennifer, and their three sons.

  Index

  Abu Dhabi fund

  Abu Dhabi Investment Authority (ADIA)

  “Academy companies”

  Ackman, Bill

  ADIA. See Abu Dhabi Investment Authority (ADIA)

  Advanced Micro Devices

  AFL-CIO

  Agrawal, Raj

  Air Partners

  Akerson, Daniel

  Alex. Brown

  Alfred E. Smith Foundation Dinner

  Alpha

  AlpInvest

  Altman, Roger

  Alvarez & Marsal

  American Pad and Paper

  Apollo

  Abu Dhabi fund stake in

  backing of Linens ‘n’ Things

  fund raising prior to IPO

  LeBlanc Teachers’ money commitment to

  Leon Black sixtieth birthday party

  on NYSE

  as one of biggest private-equity managers

  Teachers’ Retirement System of Texas and

  Apollo Global Management

  Arcapita

  Ares

  Arnold & Porter

  Arpey, Michael

  Assets under management (AUM)

  Bain & Co. and

  Blackstone hedge funds solutions business

  Blackstone real estate business

  Carlyle and

  Carlyle and Blackstone engagement in

  companies with billions in

  Augusta Columbia Capital Group

  AUM. See Assets under management (AUM)

  Avenue Capital

  Axelrod, David

  BAAM. See Blackstone Alternative Asset Management (BAAM)

  Bae, Joseph

  Bain Capital. See also Bain & Co.

  Mitt Romney as founder of

  Romney dispersion of ownership of

  Bain & Co.

  assets under management

  Capstone and

  on Dade International deal

  on Dollar General deal

  Domino’s Pizza deal

  HCA and

  jobs created through Domino and Staples

  lineage of operations

  partnership with KKR

  Baker, James III

  Bank of America

  Bank United

  Barbarians at the Gate (Burrough and Helyar)

  Barbaro, Michael

  Barrack, Tom

  Bass, Robert

  Bass, Sid

  Baucus, Max

  Bauer, Eddie

  BCE (Bell Canada Enterprises)

  BDM International

  Bear Stearns

  Beattie, Richard

  Beevers, Gary

  Bell Canada Enterprises (BCE). See BCE (Bell Canada Enterprises)

  Ben & Jerry’s Ice Cream

  Bere, David

  Berkshire Hathaway

  Beyer, Rich

  “Beyond the Buyouts”

  bin Laden family

  Black, Leon

  BlackRock:

  assets in September 2011

  Blackstone Group and

  BlackRockFink, Laurence

  Blackstone Alternative Asset Management (BAAM)

  “Blackstone bill”

  Blackstone Group. See also Blackstone Group acquisitions; James, Tony; Peterson, Peter G.; Schwarzman, Steve

  advisory group

  Alternative Asset Management Business

  annual dinner at Daniel

  diversification plan

  Dollar General deal and

  Financial Management Group and

  fund raising prior to IPO

  going public

  headquarters of

  Hedge Fund Solutions

  IP
O of

  on jobs

  New Jersey Investment Council deal with

  number of workers

  Oregon agreement with

  private equity and

  real estate business

  selling of Prime AmeriSuites Hotels

  S-1 filing with SEC

  takeover of Hilton Hotels

  TPG and

  turnover rate

  Blackstone Group acquisitions:

  of CNW

  Equity Healthcare and

  of Equity Office Properties

  of Freescale Semiconductor

  of GSO Capital Partners

  of Homestead Studio Suites

  New Jersey deal

  of Prime Hospitality

  of UCAR International

  Blankfein, Lloyd

  Blitzer, David

  Bloomberg, Michael

  Bloomberg Businessweek

  Blue Wave

  Board of Overseers

  Bode, Clive

  Bollenbach, Steve

  Bonderman, David. See also TPG

  as active environmentalist

  Barrack on

  as co-founder of TPG

  Continental and

  Coulter, Coslet, and

  joining Robert Bass

  qualities of

  sixtieth birthday party

  Teamsters members and

  on TPG IPO issue

  Boston Consulting Group

  Bower, Marvin

  Boyce, Dick

  Braniff Airlines bankruptcy

  Brimberg, Bob

  Brown Brothers Harriman

  Bruebaker, Gary

  Bruno’s

  Buffett, Warren

  Bundy, Greg

  Burd, Steven

  Burger King

  Burnham, Drexel

  Burrough, Bryan

  Bush, George H. W. (41st President)

  Bush, George W. (43rd President)

  The Business Council

  Calbert, Michael

  California Public Employees Retirement System (CalPERS)

  account arrangement

  alternative investment program

  Blackstone deal with

  Carlyle Group and