You may have heard that Steve Schwarzman had a big 60th birthday party. That was in 2007.

This week the buzz is the 60th b’day bash for another private equity mogul, Leon Black, last weekend in the Hamptons. A New York Times story on the festivities has elicited a string of bitter reader’s comments.

That has now prompted Dan Primack, a blogger for Fortune, to come to Black’s defense in a posting headlined “Lay Off Leon.” The opening line: “A rich guy threw a party. Get over it.”

Who knew that private equity had friends?


Jonathan Gray, the unassuming co-head of Blackstone’s real estate investment business, gets his due this month in a colorful profile, “Jonathan Gray, Blackstone’s Real Estate Wizard Behind the Curtain,” in the New York Observer.

We devote a chapter to his signature deal, the buyout of Equity Office Properties in 2007, which remains Blackstone’s largest deal ever, and is likely to be one of its biggest successes.

When we wrapped up King of Capital a year ago, Blackstone’s massive, $5.5 billion investment in a $29 billion buyout of the Hilton hotel chain looked like it could be a dog. The company was in no danger of going under, but the deal was signed at the very peak of the market in July 2007 and travel dropped off sharply in the recession. That looked like a recipe for a bad investment.

But no sooner had Blackstone talked Hilton’s bankers into reducing its debt and the company began a nearly miraculous turnaround, as David recounts in a recent feature in The Deal. Blackstone could easily double its money if the company stays on course.

Another large bet on the travel industry, isn’t doing so well for Blackstone, however. We cited Travelport, a back-end reservations system for airlines and travel portals such as its subsidiary Orbitz, as an example of a case where private equity ownership allowed a major restructuring that dramatically improved the company. A year ago, it looked like that would pay off on the bottom line. But now Travelport is plagued by problems, including a sluggish airline industry, mergers among major airline customers (Delta + Northwestern, then United + Continental) and an antitrust suit filed against it by American Airlines.

Travelport, which is leveraged to the hilt, has seen its cash flow fall and, this week, its debt rating was cut, as David explains in another story in The Deal.

We stick by our conclusion that Blackstone’s ownership was good for the company and, if Blackstone had exited in an IPO last year, as it hoped, it might have been a winner. Blackstone recouped almost all of its investment via a dividend in 2007, so it likely won’t lose money on the deal. But, based on Travelport’s current financial results and the valuation of Amadeus, a publicly traded competitor, Blackstone’s investment at the moment is worth nothing on paper. Plainly, things will have to improve if Blackstone is going to do more than just break even.

In all the hoopla over AT&T’s deal to buy T-Mobile USA for $39 billion, it took a couple of days to recognize one of the collateral beneficiaries: Blackstone. But Bloomberg picked up the angle.

Blackstone bought a 4.4% stake in Deutsche Telekom, T-Mobile’s parent, in 2006 — one of the weirder deals the firm had done. Blackstone borrowed most of the money for the original investment, and DT dividends covered much of the interest cost, making it essentially a free call option on DT stock. The stock had been limping along at the time, so it seemed like there was more upside than downside, and with dividends covering the loans, it had a certain kind of logic, though some of Blackstone’s investors reportedly weren’t happy at the investment. After all, they don’t pay private equity managers a 1.5%-of-assets annual fee plus 20% of the profits to invest in public stocks that the investors could buy themselves without any middlemen.

Defying expectations, DT’s stock has been a dog since 2006, but it did get a lift when the AT&T deal was announced, bringing Blackstone a little closer to breakeven.

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.

Blackstone inked a deal to buy the hotel operator Hilton Worldwide for $27 billion just as the stock, debt and real estate markets were peaking in the summer of 2007, tapping its corporate private equity and its real estate funds each for $3 billion in equity to finance the deal — the most capital it has ever invested in a single deal.

Two years into the deal, in 2009, it looked like it might be a terrible mistake, as travel fell off in the recession and property prices plummeted. Blackstone wrote down the value of its investment by 70% on its books.

Fast forward to 2011 and the deal is in the money again, according to a Feb. 2 Wall Street Journal story — not least because the banks that had lent for the buyout and had never been able to syndicate (sell on) the loans agreed to negotiate the total owed down from $20 billion to $16 billion if Blackstone kicked in some extra cash. With business up, property values on the rise and a smaller mortgage, Blackstone now reckons that the stake is, at last, worth more than it was in 2007, the Journal reports.

The Journal story gives a good overview of the history of Blackstone’s real estate group. A fuller account, naturally, can be found in King of Capital.

Blackstone’s stake in an oil field off Africa’s west coast has turned into a gusher.

In 2003 Blackstone and another buyout firm, Warburg Pincus, plunked down $300 million initially to form a new company to drill for oil in the waters off Ghana. The venture they created, Kosmos Energy, wasn’t your typical, debt-driven leveraged buyout. Instead it more resembled a venture capital start-up, with successive rounds of investment as Kosmos needed more capital. (Kosmos did, however, borrow $1 for each $1 of equity its backers had sunk in it.)

They chose a fabulous place to drill. In 2007, Kosmos and other energy companies made one of the biggest oil discoveries of the past decade: the Jubilee field. Kosmos owns 23% of Jubilee, which holds an estimated 1.8 billion barrels of oil. The stake is Kosmos’s only major asset.

Oil fields off Ghana

Now, Blackstone and Warburg have set the stage to reap profits.

On January 13, Kosmos announced plans to raise up to $500 million in an IPO. Oil industry analysts believe Kosmos might command a market value of $6 billion to $8 billion. That’s 6 to 8 times the roughly $1 billion that Blackstone and Warburg have pumped into it over the past seven years.

So rich a value would validate their decision to spurn a $5 billion offer for the Jubilee stake late last year from the state-controlled Ghana National Petroleum, which owns 14% of the field. A deal Blackstone and Warburg struck in 2009 to sell the interest to Exxon Mobil for $4.5 billion was blocked by the Ghanese government.

Blackstone has made growth investments before — with mixed results. Some of the biggest, including a German cable system build-out and an investment in Sirius, the satellite radio broadcaster, were flops.

None has delivered the high-octane returns that Kosmos surely will.

The New York Times ran a provocative piece Jan. 4 about the values private equity firms put on the companies they own – companies that are not publicly traded and thus do not have market prices. There are surprising discrepancies between the values (so-called “marks”) placed on these holdings by different PE firms that own stakes in the same companies, the story pointed out.

Given the incentive PE firms have to paper over their problems in order to placate investors, the story invited readers to ask if the numbers are simply being fudged.

One of the most striking cases the Times cited is a deal Blackstone led at the peak of the market — one of its largest investments ever. Three other co-investors now put markedly lower prices on the troubled investment:

“Freescale Semiconductor, for instance, was taken over by a pack of private investment companies in 2006 for $17.6 billion, of which $7 billion came from the firms. That $7 billion is now said to be worth $3.15 billion. Or $2.45 billion. Or $1.75 billion. The owners — the Blackstone Group, the Carlyle Group, Permira Advisers and TPG Capital — disagree on its value…. Blackstone calculates that each dollar of its initial stake in Freescale is now worth 45 cents. Carlyle and Permira value their portions at 35 cents on the dollar, and TPG at 25 cents, according to investors in the buyout funds.” (Freescale took its hits when one of its biggest customers, Motorola, had problems selling cell phones and auto sales collapsed, killing demand for the chips that go into cars.)

Is Blackstone taking too rosy a view because Freescale was its deal and the other three investors only came on board after Blackstone had been working on the investment for months? (How the deal came together is covered in detail in King of Capital.) It’s a fair question to ask.

TXU (aka Energy Future Holdings), the largest leveraged buyout ever at some $48 billion in 2007, was also cited: “K.K.R. now values its investment at 20 cents on the dollar; TPG values its stake at twice that, 40 cents.”

The Times pointed out that some of the difference is attributable to timing: As a publicly traded company, Blackstone’s financial reporting must be more up-to-date than that for non-public PE firms like Carlyle and TPG, so the difference on Freescale may be due in part to the rebound in the chipmaking industry last year.

It didn’t explain, however, just how strongly Freescale has bounced back. In the first nine months of 2010, sales soared 28%. “Adjusted Ebitda,” a measure of cash flow, meanwhile, nearly doubled: $1.06 billion in the 12 months ended Oct. 31, 2010 versus $579 million in 2009.

With a trajectory like that and a rising stock market, a fair estimate of the value of the equity becomes a rapidly moving target. If the calculations of one firm lag another’s by a quarter or more, the valuations are bound to differ. Because of the leverage, any increase or decrease in the overall value is magnified several fold in the equity.

Even without such swings in the underlying business, estimating the value of the stock of a highly leveraged company can be tricky. Take a hypothetical company that was bought for $10 billion with $3 billion in equity from a PE firm and $7 billion of debt financing. Even if the business holds steady, if the stock market falls 30% and the price of similar companies falls by that amount, in theory the PE firm’s equity is obliterated: If it were forced to sell the company, there would get only enough to pay off the company’s debt and there would be nothing left for the PE firm. The equity in theory would be worth nada.

Except that it isn’t. So long as the company doesn’t have debt coming due that it can’t pay and there is no other to force a sale now, there is value in the equity – option value, in economic terms – because the equity may regain value in the future.

What is that worth? Pity the people who have to justify a number. It hinges on how the company does in the future, what the market (and hence valuations in general) do and how the performance coincides with debt maturities (which could sink the company if they come too soon).

When you understand what’s being calculated, it’s a little easier to see why different firms come up with different figures. Indeed, if PE firms reported the same numbers, it would be downright suspicious.

Want to compare the numbers yourself? Good luck if you’re not a pension plan or other institutional investor who receives financial reports from a PE firm. There is precious little public information about individual portfolio companies.

KKR Private Equity Investors, an investment fund traded in Amsterdam, used to disclose the cost and current (estimated) value of each of its holdings. But since it was merged into KKR & Co. in 2009 and the stock was listed in the U.S., those details have been dropped. Blackstone doesn’t report detail at that level.

For information about the current marks on major buyouts, the only remaining public source is SVG Capital, a publicly traded investment fund listed in London that puts most of its money into Permira funds. SVG still regularly reports in gory detail who well and badly its holdings are doing.

Kudos to New York Magazine for crashing Blackstone’s holiday party, even if the festivities only rated 1 out of 5 for debauchery.

The good news for private equity firms is that deals are coming back as financing is easier to obtain. A statistical report this week by Thomson Reuters highlighted that. That snapshot mentioned the $3 billion buyout TPG and Leonard Green & Partners plan for the J. Crew clothing chain, but came before KKR struck a $5.3 billion agreement to buy Del Monte.

Not so lucky was Blackstone, whose $4.7 billion deal for the energy firm Dynegy fell apart in the face of resistance from shareholders, including activist investor Carl Icahn.