And not necessarily good ones at Blackstone.

Liberty Global, controlled by cable mogul John Malone, struck a deal this week to buy Kabel Baden-Württemberg, a large, regional cable network in Germany, for $5.4 billion, from EQT Partners, a European private equity firm.

For EQT, it was a successful exit from a steady, profitable business. Blackstone’s encounter with Kabel BW was not nearly so happy.

When Blackstone invested in it and a sister system in 2000 and 2001, the plan was to upgrade them to offer broadband and phone service in competition with the dominant phone company, Deutsche Telekom. Richard Callahan, a cable executive from Denver who had successfully built out other cable systems in Europe, was overseeing the venture.

Barely a year after Blackstone cut its first check, however, the investment had been wiped out – the firm’s biggest loss ever. It was an object lesson in the dangers of investing in deals led by other people (Callahan) and not doing your homework.

On paper it looked like a great opportunity. “We looked at this and said, ‘Geez. It’s a massive market, there’s only one guy, Deutsche Telekom, offering local telephony,” recalls Simon Lonergan, a former Blackstone dealmaker who was his firm’s liaison to Callahan’s managers. “If we upgrade the infrastructure and get a small piece of the phone market, the payoff could be huge.” Deutsche Telekom’s phone rates were so high that the investors figured they could easily skim off some of its customers.

But everything that could go wrong did. Callahan’s people planned to spend $1 billion the first year to install new equipment, but things quickly fell behind schedule, so the anticipated revenues from new customers and services, which were supposed to finance the build-out, didn’t materialize.

Moreover, the cable systems were hostage to Deutsche Telekom, which owned the conduits through which the cable wires ran, and Callahan’s engineers discovered that the phone company’s maps of didn’t always correspond to reality. When they installed new equipment in Cologne, they unwittingly blacked out much of the city during a key soccer match. The company found itself pilloried on the front pages of the local papers.

As revenue fell further behind budget, the company violated the conditions of the massive loans taken out to finance its buyout, giving the lenders the right to repossess. Blackstone ended up writing off virtually the entire investment — $264 million.

Schwarzman, whose wrath at those who lose money for him is legendary, was livid when Callahan arrived at his Park Avenue office to discuss what had happened. “Where’s my fucking money, you dumb shit?” were the first words out of Schwarzman’s mouth, according to a person with ties to Callahan.

“I was really furious because he was personally working on a lot of other transactions rather than keeping his focus on this particular transaction,” says Schwarzman, who calls it a “chilly meeting.” “I told him I believed he had failed.”

Blackstone ultimately made back the loss by buying up Kabel BW’s debt at a fraction of its face value (19 cents on the euro in the case of one chunk of bank debt) in 2002 and 2003 and then holding on as the companies’ debts were restructured and the businesses recovered.

In Kabel BW’s case, Blackstone amassed enough debt to gain control of the company again and turned it around. When Kabel BW was sold to EQT in 2006 and Blackstone sold the debt it had bought in the other system, it walked away with a profit of $381 million, more than recouping the $264 million loss on the first round of investments in the systems.

With the profit on the distressed debt, Blackstone restored some o fits lost credibility. Still, the overall return was measly considering that Blackstone had first invested in 2000. It certainly is not a deal Blackstone will be showcasing when it goes fundraising.

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