Video"If you made 'Private Equity: the Movie', then Michael Douglas would have to play Schwarzman." The head of one multibillion-dollar private-equity firm is talking about the head of another, the Blackstone Group's Steve Schwarzman. "I'm joking," he adds quickly, "Steve and I are good friends." Perhaps he realizes that comparisons with the fictional Wall Street banker famously portrayed by Mr. Douglas, Gordon "greed is good" Gekko, are not what his industry needs just now. In fact, Hollywood has already set its sights on the men who run this enormous, relatively unaccountable pool of capital. This year, the Carlyle Group, a huge private-equity firm, has been vilified in Michael Moore's film "Fahrenheit 9/11", as well as being named as the inspiration for a fictional private-equity firm that tries to install its brainwashed candidate as American president in the remake of "The Manchurian Candidate".
Yet to study firms such as Blackstone is as good a way as any to find out what is going on at the sharp end of capitalism today. Hedge funds may be sexier, at least for now, but it is surely Mr. Schwarzman and his peers in the private-equity industry who control the really smart money and wield the lasting influence.
In 1985, when Blackstone was founded by Mr. Schwarzman and Pete Peterson, a former commerce secretary under Richard Nixon, private equity was a cottage industry that few people had heard of. There had always been family-owned private firms, but family owners did not usually aim to sell off the business; they passed it on to the next generation.
Until the late 1970s, the main activity in private equity — buying shares in private companies in the hope of selling them at a higher price later — had been carried out mostly by the investment arms of a few wealthy families, such as the Rockefellers and Whitneys in America, and had generally been confined to venture-capital investment in small, fast-growing businesses. America's venture capitalists have become the envy of the world for developing firms such as Intel and Google from nothing more than a bright idea into big, successful companies. But these days less than one-fifth of the money the industry raises goes on providing venture capital for young firms. Much the larger part of private-equity money is spent on buy-outs of established companies.
The first of today's big private-equity firms, Warburg Pincus, was formed only in the late 1960s, and had to raise money from investors one deal at a time. By the late 1980s private equity had grown big enough to be noticed by the general public, but it made hostile headlines with a wave of debt-financed "leveraged buy-outs" (LBOs) of big, well-known firms. The industry was cast in the role of irresponsible "corporate raider" attacking from the wilder fringes of capitalism. A bestselling book by Bryan Burrough and John Helyar about the $25 billion battle in 1988 for RJR Nabisco branded two private-equity firms, Forstmann Little and Kohlberg Kravis Roberts (KKR), as "Barbarians at the Gate".
Today, the private-equity industry has moved from the fringe to the centre of the capitalist action. In the process, the leaders of private equity have earned themselves both wealth and respect — if not always respectability. The fabulously rich Mr. Schwarzman pops up in the society gossip pages for such things as paying a record $37 million for a Manhattan apartment and for demolishing his Florida mansion, allegedly without permission. He is often tipped as treasury secretary in a Republican administration.
A Magnet for the Best
In the 1980s private equity was a place for mavericks and outsiders; these days it attracts the most talented members of the business, political and cultural establishment, including many of the world's top managers. Jack Welch, the legendary former boss of GE, is now at Clayton, Dubilier & Rice. Lou Gerstner, who revived IBM, is chairman of Carlyle. Even Bono, the saintly lead singer of rock band U2, is now in the business.
Moreover, as Hollywood has noticed, private-equity firms have become the employer of choice for politicians and government officials returning to the private sector. Blackstone has hired Paul O'Neill, until recently America's treasury secretary. Carlyle has provided lucrative work for numerous luminaries, including George Bush senior, Fidel Ramos, a former president of the Philippines, John Major, a former British prime minister, and Arthur Levitt, a former chairman of America's main financial-markets regulator, the Securities and Exchange Commission (SEC).
Private equity's transformation into a mainstream industry has been greatly helped by a fundamental change in the sort of deals it does. In the late 1980s, funds often borrowed to the hilt to pay for buy-outs, many of which were seen as hostile by the management of the intended targets. Nowadays the buy-out firms' deals involve much less debt. When KKR bought America's Safeway supermarket chain in 1986, it borrowed 97 percent of the $4.8 billion the deal cost it; now a private-equity firm would typically have to stump up around one-third of the purchase price.
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