Blackstone in Black and White

Those who focus on CEO Stephen Schwarzman's opulent lifestyle are missing the point about the private equity firm's real accomplishments

by Jeffrey Sonnenfeld

It has been a dozen years since the celebrity-gawking TV show Lifestyles of the Rich and Famous died. However, there were echoes of host Robin Leach's ceaseless amazement in the numerous reports leading up to this month's historic initial public offering by the Blackstone Group (BX). But the populist critiques of the colorful parties, homes, and business style of CEO Stephen Schwarzman seem to miss the real black-and-white story of Blackstone.

Blackstone went public on June 22, with an offering price set the night before of $31 a share, the high end of the expected range. It opened the morning of the 22nd at $36.55, an 18% pop, and closed at $36.06. Thus, it appears the financial titan's stock was properly priced by its bankers, Morgan Stanley (MS) and Citigroup (C).

In addition, Blackstone held its value that day, despite an 180-point drop in the market attributed to a $3.2 billion bailout by Bear Stearns (BSC) of two of its failing hedge funds—the largest bailout since the $3.6 billion industry-wide rescue of Long Term Capital Management in 1988. Neither the fear of an imminent credit crunch resulting from the bailout nor emerging legislation that could double taxes for private equity firms like Blackstone could frighten investors.

Apologetic Competitors

But instead of examining the business performance that merited such investor confidence, most of the reporting has been sensational, focusing on the $8 billion to $11 billion in asset value held by Schwarzman, the quality of his art collection, his 34-room triplex (the former home of John D. Rockefeller), and the celebrities who have attended his parties. Journalists are joined in their oblique criticism by legislators from both parties seeking to appear populist and by competitors who are more circumspect, if not almost apologetic, about their own success. Indeed, in conversations with several private equity moguls, I have heard them refer to the potential new tax liabilities targeting their industry as "the Blackstone Bill."

However, the market is not discouraged by such discussions, as it sees something in the Blackstone story to admire. Perhaps it is the astonishing record this young firm has enjoyed. Since its inception in 1987, Blackstone has enjoyed 24% annualized returns, more than twice those of the Standard & Poor's-stock index for the same period. It has advised successful restructurings of such major enterprises as Xerox (XRX), Chiquita (CQB), and ~~ and has orchestrated the leveraged buyouts of signature properties in publishing, entertainment, hospitality, and real estate.

This spring's $39 billion purchase of Sam Zell's Equity Office Properties—the largest private equity deal in history—redefined the late stage for real estate investment trust (REIT) programs and is already proving to be a brilliant capital market investment. While Blackstone partners have made as much as 1.5% in management fees on the assets that the firm oversees (which need to be repaid before Blackstone partners share in the carried interest) and up to 20% on any profits made in private equity investments, the investors themselves—often large pensions and institutional funds—have been big winners. History was made again this spring when China bought a 9% stake in this enterprise. So why aren't journalists focusing on this record instead of conjuring up Gatsbyesque images of Schwarzman?