Capital Markets

Raging Bull

Steve Schwarzman declares the dawn of a new golden age for private equity.
Economist StaffNovember 12, 2008

“I’M NOT Robert de Niro, but I’m a raging bull on private equity,” enthused Steve Schwarzman on October 28th. And, lest his strikingly contrarian message be lost on the mostly worried investors gathered at the North American Venture Capital Summit in Canada, the co-founder of the Blackstone Group described this as a “wonderful, wonderful time to be an investor”, an “opportunity now of enormous proportions” in which “it is very easy to make money” and “you basically can’t lose.”

Economic gloom is spreading throughout the world, and many of his fellow financiers are fighting to preserve their shrinking fortunes, including two rival private-equity giants: Kohlberg Kravis Roberts (KKR), which has again postponed its initial public offering (IPO) due to difficult market conditions, and the Carlyle Group, which this week told investors not to expect returns on their money any time soon. Yet Mr. Schwarzman’s exuberance is of the rational kind — which doubtless makes it all the more galling to his many critics. The severity of the pain felt by others in the financial system is what is creating desperate sellers — and thus the glorious investment opportunities that could ultimately make Mr. Schwarzman and his investors richer than ever.

As the old saying goes, the best time to invest is when there is blood in the streets (in this case, Wall Street). And unlike many of his erstwhile rivals, Mr. Schwarzman still has plenty of cash to invest. Blackstone closed a record $21 billion fund just as the credit crunch began in August 2007, and has reportedly raised the first $9 billion of a new fund already this year. Though debt is scarce for most deals, meaning Blackstone must risk more of its equity, it has been preparing for a downturn, for example by buying a hedge fund with expertise in stressed debt.

When Warren Buffett urges ordinary investors to buy shares, as he did the other week, after negotiating highly favourable terms for his own firm for valuable stakes in companies such as Goldman Sachs and GE, he is praised for his sage leadership. By contrast, although Mr. Schwarzman may have an even better case to make, he lacks Mr. Buffett’s power to charm. Instead, his speeches often earn him epithets such as “self-serving”, “arrogant”, and “too cocky by half.” A blogger on peHUB, an online forum for private-equity types, described Mr.Schwarzman’s upbeat message in Canada as “either one of the laziest keynote speeches I have ever seen, or one of the most condescending.”

Mr. Schwarzman may be right to say that pointing out the existence of a silver lining to the very dark cloud shrouding the global economy is “actually meant to be uplifting, in a twisted financial way”. But such “making money is easy” comments could also help him regain the title of “Wall Street Titan the Public Loves to Hate.” He lost it only recently to Dick “the Gorilla” Fuld, who presided over the bankruptcy of Lehman Brothers in September. (Mr. Schwarzman began his career at Lehman, but, as he quipped last week, he “got out…at the right time.”)

For most of the 23 years since he founded Blackstone with Pete Peterson, Mr. Schwarzman prospered largely unnoticed by the public, who if they knew anything at all about private equity, associated it with Henry Kravis of KKR. Mr. Kravis’s notorious hostile takeover of RJR Nabisco has just been commemorated with a 20th anniversary edition of the bestselling book about it, “Barbarians at the Gate.” Mr. Schwarzman’s image problems became serious only when he turned 60, and paid Rod Stewart a reported $1m to help him celebrate. Even though this was dwarfed by the sum reportedly paid by another private-equity chief, David Bonderman, to his 60th birthday party entertainers, the Rolling Stones, Mr. Schwarzman’s party gave the press the opportunity to run lots of articles about his expensive homes and lavish tastes.

Things got worse when the prospectus for the IPO of shares in Blackstone drew attention to the favourable tax treatment typically given to private-equity firms, prompting a frenzied attack on the industry by politicians around the world. (However, thanks to some astute negotiations between Mr. Schwarzman and the SEIU, an influential trade union, when proposals for tougher taxation of private equity make their way through Congress next year, as they surely will, the “offenders” mentioned most often by politicians will probably be Blackstone’s rivals at KKR.)