Issues & Opinions

There’s nothing unique these days about finding someone who questions the belief that private equity is soon to replace all public equity markets. So that’s not what this item is about. I profess no opinion on whether there’s a private equity bubble, or whether that bubble, if it even existed, is about to pop.

This is much more mundane.

Blackstone is of course in the middle of a slow strip-tease with the market, effected via periodic updates to its S-1 filing with the SEC. The latest of these, in combination with some recent press in yesterday’s WSJ, entitled “How Blackstone’s Chief Became $7 Billion Man“, is enough to open some eyes about Stephen Schwarzman, Blackstone’s other principals, and private equity generally.

First, the numbers, from the WSJ article just mentioned:

Later this month, the giant buyout firm intends to go public, offering many investors their first opportunity to share the kill. If there was ever a doubt about what investors will be buying, a Securities and Exchange Commission filing Monday cleared that up: Mr. Schwarzman utterly dominates the firm. He stands to pocket as much as $677.2 million, and will retain a 23% stake in Blackstone, likely to be worth more than $7.5 billion.

By the way, according to my math, that would make him a “More than $8 billion man”, contrary to the WSJ headline, but that’s neither here nor there. Also neither here nor there, for the purposes of my small commentary on the matter, is the number of zeroes after any of the numbers just cited. Witness the subtitle to the article: “Schwarzman Says He’s Worth Every Penny”.

And not that my opinion on it matters a whit, I believe him. He’s worth whatever are the results of his efforts so far, from 1985 to today, as evidenced by the fact he continues to control Blackstone, a successful enterprise. If the markets decide to take him and Blackstone up on their offer of 10% of the entity for about $4.7 billion, then the fact that he ends up controlling a $7.5 billion stake is subject to the arithmetic and judgment of the market, not some specious claim on his part that he’s magically worth any given number. So the numbers don’t concern me, not in the least. Bully for him, and may his success continue, notwithstanding the other part of the subtitle to the story “$400 for Stone Crabs”. Populist rhetoric, and pretending to give a care how much Schwarzman spends on his meals, is of no interest to me, though the headline writer and authors of the WSJ piece seem to feel differently.

Here’s the part that’s troubling: The risk factors on page 32 of the amended S1 (see Edgar) are not, to steal from one of Google’s license agreement pages, “The usual yadayada”. They’re quite real, including the cost of the leverage Blackstone and other PE houses use, but most importantly including the proposals presently afoot to radically change the taxation of private equity’s carried interest in its investments. No less a luminary than Robert Rubin has come out in favor of ordinary income treatment for carried interest (via Daniel Primack @peHub).

Add to that the unique structure of the deal (from the S-1/A), which dispenses with the difficulties of having to be responsive to public equity holders:

Unlike the holders of common stock in a corporation, our common unitholders will have only limited voting rights and will have no right to elect our general partner or its directors, which will be elected by our founders (the State Investment Company will not have voting rights in respect of any of its common units).

Or, as the WSJ says:

Mr. Schwarzman intends to run it without instituting such traditional corporate-governance restrictions as having a majority of independent directors, according to an offering document.

And here’s the other part that’s troubling: In the WSJ piece, there were several non-money related matters on which Schwarzman comes off looking like a goofball who’s in love with himself and everything he does. Not very Buffett-like at all. They include:

When he pursues deals as the chief executive of Blackstone Group, he says, he wants to “inflict pain” on and “kill off” his rivals.

Over the course of several conversations earlier this year, Mr. Schwarzman said he views each deal as a contest to the death. His intended message to the market: Blackstone will get what it wants at the price it wants to pay. Mr. Schwarzman likes battles to play out quickly. “I want war — not a series of skirmishes,” he said of his philosophy. “I always think about what will kill off the other bidder.”

“I didn’t get to be successful by letting people hurt Blackstone or me,” he said. “I have no first-strike capability. I never choose to go into battle first. But I won’t back down.” Mr. Schwarzman declined to talk specifically about Blackstone’s business. SEC rules impose a “quiet period” before a public offering.

Well, thank goodness for the SEC, because by that point, Schwarzman had already said way too much. The brashness and bravado is not really all that shocking, seen in the light of his 60th birthday bash, earlier this year:

…an extravagant affair at New York’s Park Avenue Armory…

Mr. Schwarzman had no qualms about stage managing the accolades. When Blackstone colleagues prepared a video tribute, he sought to squelch any roasting, asking his peers not to poke fun at him.

…

Judging by the lavishness of his birthday bash, which was extensively chronicled in the press, he isn’t particularly concerned about being seen as ostentatious. The Armory’s entrance hung with banners painted to replicate Mr. Schwarzman’s sprawling Park Avenue apartment. A brass band and children clad in military uniforms ushered in guests. A huge portrait of Mr. Schwarzman, which usually hangs in his living room, was shipped in for the occasion.

The affair was emceed by comedian Martin Short. Rod Stewart performed. Composer Marvin Hamlisch did a number from “A Chorus Line.” Singer Patti LaBelle led the Abyssinian Baptist Church choir in a tune about Mr. Schwarzman. Attendees included Colin Powell and New York Mayor Michael Bloomberg.

But here’s the thing - it’s unseemly, and utterly unnecessary for Schwarzman to revel so deeply in his self-image. Not only doesn’t Warren Buffett do it, Bill Gates doesn’t do it either. Larry Ellison? Well, he does it, but who wants to be like Ellison?

David Bonderman, co-founder of TPG, summarized it well:

“When Steve Schwarzman’s biography with all the dollar signs is posted on the Web site” when Blackstone becomes a public company, he said, “none of us will like the furor that results — and that’s even if you like Rod Stewart.”

Schwarzman and his firm are exceedingly competent, particularly in an era of easy money and low rates, and deserve all the wealth they’ve created for themselves. But in a world where writers, at the WSJ and elsewhere, consider it good copy to fulminate on the wretched excess that comes from having far more money that one could ever spend, wisdom might dictate a bit more quiet enjoyment of one’s well earned riches, and a fewer martial metaphors for describing one’s business dealings.

Lumberjacks and populists always like to take their axes to the biggest of trees, because they make the most noise when they fall. It’s not at all inconceivable to think that some day, perhaps some day soon, Mr. Schwarzman could come to regret the public image he’s portrayed for himself, particularly since he hasn’t seemed to have needed such a public image in the past 21+ highly successful years.

Addendum - Whoops. At WSJ’s Deal Blog, two items posted late today:

Congress Puts a Chill in Blackstone’s IPO

Congress has finally lowered the hammer on the private-equity industry. And it’s hitting Blackstone Group in the head.

Sens. Max Baucus and Charles Grassley, the ranking Democrat and Republican on the Finance Committee, introduced a bill today that would eliminate favorable tax treatment for the private-equity firm, which is planning to go public later this month.

…and this:

Jesse Jackson Cries Foul Over Blackstone IPO

Jesse Jackson is not impressed with Stephen Schwarzman’s new-found wealth. What Jackson is more focused on is the list of underwriters for the $4.7 billion IPO of Schwarzman’s firm, The Blackstone Group. In an interview with Deal Journal, Jackson says the share sale unfairly shortchanges minority-owned firms.

“We’re going to protest this pattern of exclusion,” Jackson says. He calls it “Wall Street apartheid.”

Jesse Jackson’s opinion on any matter is a good counter-indication of rational thought, and he’s the second biggest race-hustler in the US. His opinions on Blackstone are beneath immaterial, and will be ignored by all right-thinking people. However, Mr. Schwarzman has invited such baseless attacks, whether he planned to or not.

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