King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone
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Hundreds of other facts pertaining directly to Blackstone were also checked with the firm in writing as the book neared completion. These ranged from simple dates and dollar amounts to the substance of discussions and sequences of events—information first obtained from interviews inside and outside the firm and from documents.
Blackstone did not at any stage review the manuscript, nor were the characterizations, observations, conclusions, or opinions here shared with or vetted by Blackstone.
As a condition of its cooperation, Blackstone required the authors to check all quotes and facts explicitly attributed to the firm or people there, a condition imposed by many sources and companies when dealing with journalists. In no case did the firm or the source substantially modify a quote except where it was factually mistaken, unclear, or ungrammatical. Of the hundreds of quotes from sources at Blackstone included in the book, only a handful were changed in any way. Because most Blackstone sources were interviewed on more than one occasion and the quotes were later verified in writing, dates are not listed for those interviews.
Some sources agreed to speak only if they were not identified. Because in many cases other portions of the same interviews were on the record and the source and the date of the interview are identified here, we have not included dates for interview material obtained on background.
Abbreviations
IPO Prospectus: Prospectus, Form 424B4, Blackstone Group LP, June 21, 2007, available at www.sec.gov/edgar.shtml.
PPM for BCP V: Confidential Private Placement Memorandum for Blackstone Capital Partners V fund (undated) and supplements in April and October 2005.
PPM for BCP VI: Confidential Private Placement Memorandum for Blackstone Capital Partners VI fund (undated) and updated investment results through December 31, 2008.
NYT: New York Times
WSJ: Wall Street Journal
Anders, Merchants: George Anders, The Merchants of Debt: KKR and the Mortgaging of American Business (Washington, DC: Beard Books, 2002; originally published by Basic Books, 1992).
Auletta, Greed: Ken Auletta, Greed and Glory on Wall Street: The Fall of the House of Lehman (New York: Warner Books, 1986).
Baker and Smith, Capitalists: George P. Baker and George David Smith, The New Financial Capitalists: Kohlberg Kravis Roberts and the Creation of Corporate Value (Cambridge, England: Cambridge University Press, 1998).
Bruck, Predators: Connie Bruck, The Predators’ Ball: The Junk Bond Raiders and the Man Who Staked Them (New York: The American Lawyer / Simon & Schuster, 1988).
Burrough and Helyar, Barbarians: Bryan Burrough and John Helyar, Barbarians at the Gate: The Fall of RJR Nabisco (New York: Harper & Row, 1990).
Finkel and Geising, Masters: Robert A. Finkel and David Geising, The Masters of Private Equity and Venture Capital (New York: McGraw-Hill, 2010).
Peterson, Education: Peter G. Peterson, The Education of an American Dreamer: How a Son of Greek Immigrants Learned His Way from a Nebraska Diner to Washington, Wall Street, and Beyond (New York: Twelve, 2009).
Stewart, “Party”: James B. Stewart, “The Birthday Party,” New Yorker, February 11, 2008.
Wasserstein, Big Deal: Bruce Wasserstein, Big Deal: The Battle for Control of America’s Leading Corporations (New York: Warner Books, 1998).
Citations to company financials refer to quarterly and/or annual financial reports (Forms 10-Q and 10-K) filed with the U.S. Securities and Exchange Commission, which are available at www.sec.gov/edgar.shtml. Where reference is made to something more obscure than the figures in the main financial statements, we have included the SEC’s form or schedule number as well as the date of the filing so the reader can find the document online.
Chapter 1: The Debutants
1 “More Rumors” … $1 million for such appearances: Landon Thomas Jr., “More Rumors About His Party Than About His Deals,” NYT, Jan. 27, 2007; Michael J. de la Merced, “Dealbook—Inside Stephen Schwarzman’s Birthday Bash,” NYT, Feb. 14, 2007; Richard Johnson with Paula Froelich, Bill Hoffmann, and Corynne Steindler, “Page Six—$3M Birthday Party Fit for Buyout King,” New York Post, Feb. 14, 2007; Michael Flaherty, “Blackstone CEO Gala Sign of Buyout Boom,” Reuters, Feb. 14, 2007; Richard Johnson with Paula Froelich, Bill Hoffmann, and Corynne Steindler, “Page Six—No Room for Henry At Bash,” New York Post, Feb. 15, 2007; also background interview with an attendee.
2 At the closing price: The $38 billion includes the equity units held by Blackstone partners that were not publicly traded.
3 Going public had laid bare: IPO Prospectus.
4 By 2007 private equity: Thomson Reuters data compiled for the authors on May 26, 2009.
5 There was even talk: “Behind Home Depot Rumors,” CNBC Faber Report, http://www.cnbc.com/id/16037251, Dec. 4, 2006.
6 Blackstone alone owned all: Blackstone.
7 Goldman Sachs had 30,500 employees: Goldman Sachs Group, annual report Form 10-K for fiscal year ending Nov. 30, 2007, Jan. 29, 2008, 15; Blackstone, annual report Form 10-K for 2007, Mar. 12, 2008, 11.
8 In a telling episode: David Carey and Vipal Monga, “Wielding the Club: The Warner Chilcott Affair,” The Deal, May 19, 2005.
9 It was bigger than KKR: IPO Prospectus, 1; AIM Program Fund Performance Review, California Public Employees’ Retirement System, as of June 30, 2007; Alternative Investments Portfolio Performance, California State Teachers’ Retirement System, as of Mar. 31, 2007.
10 The backlash against the buyout: “German SPD Head Says to Fight Capitalist ‘Locusts,’ ” Reuters, Apr. 17, 2005; Kerry Capell, with Gail Edmondson, “A Backlash Against Private Equity,” BusinessWeek, Mar. 12, 2007.
11 Even the conservative Wall Street Journal: Alan Murray, “A Question for Chairman Bernanke: Is It Time to Yank the Punch Bowl?” WSJ, Feb. 14, 2007; “The Blackstone Tax” (unsigned editorial), WSJ, June 20, 2007.
12 A growing body of academic research: See chapter 25.
13 Notwithstanding the controversy: Julie Creswell and Vikas Bajaj, “$3.2 Billion Move by Bear Stearns to Rescue Fund,” NYT, June 23, 2007.
14 Like shopalcoholics: Blackstone annual report Form 10-K for 2008, Mar. 3, 2009, 158.
15 On the contrary: Two background interviews.
16 For starters, the industry was sitting: Hugh MacArthur, Graham Elton, Bill Halloran, et al., Global Private Equity Report 2010, Bain & Co., Mar. 10, 2010 ($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).
17 Though new fund-raising slowed: California Public Employees’ Retirement System (CalPERS) press release, June 15, 2009 (increased from 10 percent to 14 percent); Keenan Skelly, “Calstrs Raises Target Allocation to 12%,” LBO Wire, Aug. 17, 2009; Mar. 8, 2010, e-mail from Robert Whalen, press officer for New York State Comptroller Thomas P. DiNapoli (confirming that the New York State Common Retirement Fund raised its allocation from 8 percent to 10 percent in November 2009).
Chapter 2: Houdaille Magic, Lehman Angst
1 “I read that prospectus”: Stephen Schwarzman interview.
2 “When Houdaille came along”: Richard Beattie interview, Aug. 5, 2008.
3 Weeks after: Michael M. Thomas, “Windfall—A Game of 1980s High Finance,” New York, Aug. 8, 1983, 22ff; Ann Crittenden, “Reaping the Big Profits from a Fat Cat,” NYT, Aug. 7, 1983.
4 Simon himself called his windfall: Crittenden, “Reaping the Big Profits.”
5 He couldn’t help but pay attention: Schwarzman interview.
6 Virtually from the day: Peter Peterson interview.
7 But by the time Peterson arrived: Warren Hellman, in Finkel and Geising, Masters, 55.
8 When Peterson joined: Ibid., 54.
9 They even went so far: Peterson and Schwarzman interviews.
&nbs
p; 10 Schwarzman would invite: Beattie interview.
11 His rise up the corporate ladder: Auletta, Greed, 35ff.
12 Though Peterson had allies: Peterson, Education, 147ff.
13 At one point: Ibid., 147–48.
14 John Connally: Ibid., 148–51.
15 Nixon dumped Peterson: Ibid., 193ff.
16 But two months after being recruited: Ibid, 218–19; Auletta, Greed, 48.
17 The man responsible: Peterson, Education, 218–19; Auletta, Greed, 48.
18 “I argued that the guy”: Warren Hellman interview, June 4, 2008.
19 In 1975 BusinessWeek: “Back from the Brink Comes Lehman Bros.,” BusinessWeek, Nov. 1975.
20 “He kept calling”: Background interview with a former Lehman partner.
21 But with colleagues: Auletta, Greed, 16ff; background interview with a former Lehman partner.
22 At times, he seemed to inhabit: Background interviews with several former colleagues of Peterson’s and with the head of a New York private equity firm.
23 Howard Lipson: Howard Lipson interview, May 29, 2008.
24 In his conference room: Personal observation.
25 “Pete was probably thinking great thoughts”: David Batten interview, Oct. 1, 2008.
26 Since the death: Auletta, Greed, 32ff; Peterson, Education, 215ff.
27 One Lehman partner was rumored: Peterson, Education, 216.
28 In a case of double-dealing: Ibid., 236–37.
29 Robert Rubin: Hellman, in Finkel and Geising, Masters, 54.
30 “I don’t understand why”: Stewart, “Party.”
31 The bitterest schism: Auletta, Greed, 3ff; Peterson, Education, 216.
32 Peterson tried to bridge: Peterson, Education, 225–32.
33 He was closest to Hellman: Ibid., 216–17.
34 Of the younger partners: Peterson interview.
35 Those qualities were prized: Peterson and Schwarzman interviews.
36 “I guess I was thought of”: Peterson interview.
37 Harvester’s CEO: Peterson, Education, 231; Schwarzman interview.
38 Similarly, Peterson landed Bendix: Schwarzman interview.
39 Schwarzman’s family: Schwarzman interview.
40 That shone through: Karen W. Arenson, “Stephen Schwarzman, Lehman’s Merger Maker,” NYT, Jan. 13, 1980.
41 At a company outing: Stewart, “Party.”
42 As one Lehman alumnus: Background interview.
43 “He had a pretty good ego”: Hellman inverview.
44 Ralph Schlosstein: Ralph Schlosstein interview, July 25, 2008.
45 “We made it up”: Schwarzman interview.
46 He sensed that Glucksman: Auletta, Greed, 70ff; Peterson, Education, 255ff.
47 “He had a corner on the trading area”: Peterson interview.
48 Schwarzman and other Lehman partners: Peterson, Education, 260.
49 Some of Peterson’s friends: Auletta, Greed, 69ff; background interviews.
50 Peterson owns up to being “naïve”: Peterson, Education, 256, 266.
51 It was Schwarzman: Schwarzman interview; Auletta, Greed, 190ff.
52 Shearson insisted that most Lehman partners: Auletta, Greed, 208.
53 He yearned to join: Schwarzman interview.
54 Cohen agreed: Schwarzman and Peterson interviews.
55 “The other [Lehman] partners”: Background interview with a former Lehman partner.
56 Asked why Schwarzman thought: Background interview with someone who knows Schwarzman.
57 In the months after: Background interviews with two former Lehman partners.
58 “Steve and I were highly complementary”: Peterson interview.
59 Eventually, Peterson: Peterson interview.
60 “It was a brutal process”: Peterson interview.
61 Shearson had drawn up: Peterson and Schwarzman interviews.
62 In Schwarzman’s mind: Background interviews with three people who know Schwarzman.
63 “Steve doesn’t forget”: Background interview.
64 “The idea of giving”: Peterson interview.
Chapter 3: The Drexel Decade
1 Corporate conglomerates: Wasserstein, Big Deal, 55ff; Baker and Smith, Capitalists, 16ff.
2 KKR, which opened its doors: Baker and Smith, Capitalists, 52ff; Burrough and Helyar, Barbarians, 133ff.
3 On his thirtieth birthday: Burrough and Helyar, Barbarians, 133.
4 In 1976, Kohlberg: Ibid., 136–38.
5 The trio’s inaugural fund: Background interview with a KKR partner.
6 That success made KKR a magnet: IPO Registration Statement, Form S-1, KKR & Co. LP, Oct. 31, 2008, 233.
7 Goldman’s partners agonized: Steven Klinsky interview, June 6, 2008.
8 It was only half KKR’s size: Background interview.
9 Ted Forstmann: Burrough and Helyar, Barbarians, 235ff.
10 He swiftly proved himself a master: Forstmann Little & Co. undated confidential private placement memorandum, late 1990s.
11 In the 1960s, conglomerates’ stocks: Wasserstein, Big Deal, 64ff.
12 But reality caught up: Ibid., 71ff; Baker and Smith, Capitalists, 48–49.
13 A banner year: Kohlberg Kravis Roberts & Co. undated confidential private placement memorandum, late 1990s; Forstmann Little & Co. confidential private placement memorandum, late 1990s; news reports.
14 As KKR, Forstmann Little: Kohlberg Kravis Roberts & Co. and Forstmann Little & Co. private placement memoranda, late 1990s.
15 When Henry Kravis demurred: Anders, Merchants, 85.
16 “It was like falling off a log”: Daniel O’Connell interview, 1994.
17 Renowned for his work ethic: Wasserstein, Big Deal, 81–85; Anders, Merchants, 83–108; Bruck, Predators, 10ff.
18 After a breakout year: Bruck, Predators, 78.
19 KKR was one of the first: Baker and Smith, Capitalists, 25; Anders, Merchants, 88.
20 Kravis called Drexel’s ability: Anders, Merchants, 89.
21 At their peak in the mid-1980s: Ibid., 83; Wasserstein, Big Deal, 83.
22 Investors in KKR’s first five funds: Amendment 6 to Form S-1, KKR & Co. LP, Oct. 31, 2008, 233.
23 Jerry Kohlberg resigned: Baker and Smith, Capitalists, 179–80; multiple news accounts.
24 The hunted and the hunters: An excellent summary of the verbal warfare between raiders and the corporate establishment in the 1980s, of how the press portrayed buyout artists, and of the political backlash against them can be found in Baker and Smith, Capitalists, 14–40.
25 After buying up shares: Wasserstein, Big Deal, 108–9; news accounts.
26 Other times, the company: Wasserstein, Big Deal, 109, 135; news accounts.
27 Peltz ran National Can: Wasserstein, Big Deal, 108–10; David Carey, “Can Raiders Run What They Raid?” Fortune, June 4, 1990.
28 The device wasn’t new: Wasserstein, Big Deal, 57–58, 72ff, 618ff; Baker and Smith, Capitalists, 18ff.
29 A giant of the M&A bar: Bruck, Predators, 204ff; Wasserstein, Big Deal, 146.
30 KKR touted itself: Wasserstein, Big Deal, 95; Baker and Smith, Capitalists, 99.
31 “We came into a contested situation”: Richard Beattie interview, Aug. 5, 2008.
32 KKR used this tactic: Baker and Smith, Capitalists, 84; Wasserstein, Big Deal, 97; news accounts.
33 “We don’t have assistants”: Carol J. Loomis, “Buyout Kings,” Fortune, July 4, 1988.
34 In a series of hearings: Wasserstein, Big Deal, 79–80; Baker and Smith, Capitalists, 33ff.
35 At a meeting: Baker and Smith, Capitalists, 91–92.
36 Though he had made his name: Burrough and Helyar, Barbarians, 233–34 and 240–41; Theodore J. Forstmann, “Corporate Finance, ‘Leveraged to the Hilt’—Violating Our Rules of Prudence,” WSJ, Oct. 25, 1988.
37 Forstmann would privately rant: Burrough and Helyar, Barbarians, 234; see also Anders, Merchants, 125 (“Tall and athletic, Forstmann routinely called Kr
avis and Roberts ‘the midgets’ ”).
38 Kravis, for his part: Burrough and Helyar, Barbarians, 129.
Chapter 4: Who Are You Guys?
1 The name, Schwarzman’s invention: Peter Peterson and Stephen Schwarzman interviews.
2 Their quarters: Steven Mufson, “Creating Connections at Blackstone Group,” Washington Post, July 30, 1989.
3 The funding was similarly frugal: Peterson and Schwarzman interviews.
4 That was nothing to Peterson: Auletta, Greed, 221.
5 Schwarzman, too, had made: Interviews with Schwarzman and his tax accountant.
6 They worried that if they ran … Disheartened that his client: Schwarzman interviews.
7 KKR, the buyout front-runner: Kohlberg Kravis Roberts & Co. confidential private placement memorandum, late 1990s.
8 KKR, the biggest operator: Form S-1, KKR & Co. LP, Oct. 31, 2008, 233.
9 While the individual partners: Dyan Machan, Stephen Taub, Paul Sweeney, et al., “The Financial World 100: The Highest Paid People on Wall Street,” Financial World, July 22, 1986, 21.
10 “The problem was”: Peterson interview.
11 “Pete and I expected” … By the winter of 1986: Schwarzman interview.
12 But Peterson had done business: Peterson interview; Garnett Keith interview, July 30, 2008.
13 Prudential insisted: Michael Puglisi and Schwarzman interviews.
14 It paid off particularly in Japan: Schwarzman interview.
15 “We’d congratulate ourselves”: Schwarzman interview.
16 In June, Peterson bumped: Peterson interview.
17 Even more momentous … “It was probably the luckiest”: Schwarzman interview. The $635 million figure for the fund is from a reprint of a late 1987 Blackstone newspaper ad.
Chapter 5: Right on Track
1 It took a ten-year lease: Blackstone; Stephen Schwarzman interview.
2 Peterson and Schwarzman: Peter Peterson and Schwarzman interviews.