Trust Dealbreaker to have dug this up:

Anna and Karl? (aka Christine and Steve Schwarzman)

Though the economy is still in the dumps, the leveraged buyout market has reverted to pre-recession form.

That’s not to say $20 billion-plus deals, which proliferated in 2006 and 2007, are back in vogue. Still, in recent months the LBO market has mounted an impressive comeback. Lenders have opened their purses, bidding battles have picked up and deal values have soared.

Too high, in the estimation of Blackstone president and chief operating officer Tony James.

“We’re routinely priced out of the market” nowadays, said James in a late October earnings call with the media. “There are some good companies that are being sold, but we just can’t get to the prices that are required.”

That’s exactly what befell Blackstone at the peak of the buyout market in 2007, when more aggressive private equity firms often outbid it.

James blamed the high prices on the “hot” debt markets. Even though it remains hard to get a mortgage to buy a house, yield-hungry lenders are “fueling a feeding frenzy” for debt tied to LBOs, he said. For bidders, that’s powerful ammunition. (Buyouts are financed with a combination of debt and equity.)

“It’s hard to believe” how swiftly the debt markets have stormed back, James observed.

On the flip side, the lofty valuations favor sellers, James said. Accordingly, Blackstone, which has sold down $1.3 billion of its holdings this year, is in talks to sell several companies it owns, including United Biscuits, the U.K.-based maker of Jaffa Cakes and Carr’s Crackers it bought in 2006 for just over $3 billion. It also aims to exit some holdings via initial public offerings.

Deal values edged into nose-bleed territory this spring, with TPG Capital’s purchase of American Tire Distributors for $1.3 billion — about 12 times cash flow. Valuations of other recent buyouts have topped 8 times. That compares with 4 to 7 times for many deals in 2008 and 2009.

Blackstone hasn’t sat on the sidelines entirely. In August it agreed to buy power-generator Dynegy for $4.7 billion, and last month it struck a $400 million deal to buy chemicals maker Polymer Group.

Even so, James remarked, Blackstone likely will commit a total of just $3 billion to $3.5 billion of equity in 2010 to buyouts.
That’s in line what it invested in 2008 and 2009, when the debt markets were stingy and it was hard to finance deals.

See Blackstone’s third quarter earnings announcement.

So who are these guys who wrote this book? Check out our videos:

John talking about the book on CNBC’s Power Lunch.

David discusses Blackstone and the book with The Deal’s Vipal Monga.

John discusses Blackstone and the book with’s Gregg Greenberg

Shortly after Blackstone raised its first buyout fund in 1987, it made what proved to be a disastrous investment in a company called Edgcomb Steel. A month after the deal closed and Blackstone acquired the company, Edgcomb was unable to make its first interest payment to its creditors. A wipe-out so early on could have been crushing Blackstone, which had yet to establish its credibility with investors.

Steve Schwarzman told CNBC in an interview recently about the ill-fated investment, and what he learned from it.

For entertaining commentary on the interview, check out

Anyone looking for signs that the commercial real estate market has turned the corner should take note: Blackstone has been snapping up properties in recent months.

In real estate Blackstone has been an adroit market timer. It offloaded tens of billions of dollars of properties shortly before the bubble burst in 2007-2008, then stood pat for two years as values plunged. Now, it has jumped back in with a vengeance. It is even buying properties it once owned.

In mid-October Blackstone and two other investment firms, Paulson & Co. and Centerbridge Partners, bought hotel chain Extended Stay out of bankruptcy for $3.9 billion and then inked a deal to take over a portfolio of 180 industrial warehouses from their over-extended owner, ProLogis, for $1 billion. Weeks earlier it snapped up $300 million of junk bonds in struggling Kentucky hotel operator Columbia Sussex. Those deals followed other two other recent investments by Blackstone in ailing property businesses.

Extended Stay and Columbia Sussex were familiar targets. Blackstone bought the former in 2004 and unloaded it for $8 billion in 2007, and it sold a group of 14 hotels to Columbia Sussex for $1.4 billion in 2006. Both sales fetched high prices — so high that the buyers got burned when the real estate market tanked. Now Blackstone is picking up the leavings.

Jonathan Gray: Blackstone's co-head of real estate

Those weren’t Blackstone’s only deftly timed sales. In 2007 it bought the country’s biggest office-building owner, Equity Office Properties, for $39 billion. It then swiftly dealt away two-thirds of EOP’s assets at wildly high prices, thus shielding itself when property values tumbled soon after. Many of the buyers took a bath when the market turned.
Considering its record, Blackstone’s plunge back into commercial real estate is maybe as good a sign as any that the worse is over.

Blackstone watchers meanwhile are waiting to see if it will train it sights on other familiar prey: the wreckage of its EOP sell-off. So far it isn’t known to have targeted those leftovers. But if the past is any guide, chances are that it will.

Columbia Sussex hotel - St. Louis Airport

You may have seen that Henry Kravis of KKR agreed this week to give $100 million to Columbia Business School to construct a new B school complex northwest of the main Columbia campus.

Hmmm. Didn’t we hear about another buyout mogul giving a similar amount not long ago? Indeed, Steve Schwarzman gave $100 million to the New York Public Library in 2008.

NY Public Library lions

Both men will have their names on their buildings. (Fair enough if you cut a check for $100M.) But it certainly seems like Schwarzman got the better deal — prime real estate in Midtown (5th Avenue at 42nd). Not to mention those lions. Let’s not forget the lions.

What did Kravis get? A to-be-built building in an industrial zone that, well, frankly isn’t that attractive.

Where Columbia plans to build

Blackstone’s launch was inauspicious. It would take two long years to raise their first buyout fund — two years of humiliating rejections. Their travails are chronicled in an excerpt from the book in this week’s issue of The Deal:

They opened an office on the thirty-fourth floor of the Seagram Building, the elegant Mies van der Rohe- and Philip Johnson-designed skyscraper on Park Avenue just north of Grand Central Station. Their quarters were conspicuously austere: just 3,067 square feet, which they outfitted with two desks and a used conference table. There was one other employee, Peterson’s secretary.

The funding was similarly frugal: $400,000, half from each partner, to pay Blackstone’s bills until cash started coming in. That was nothing to Peterson, who had pocketed more than $13 million in severance pay and from his cut of the money from Lehman’s sale to Shearson. Schwarzman, too, had made a bundle, $6.5 million, from the sale of his Lehman shares. But though the amount they staked to Blackstone was comparatively small, they were determined not to risk any more. They worried that if they ran through the money before Blackstone started to pay for itself, it would bode ill for their venture. More . . .

Why did Blackstone go public in 2007?

It had more than a little to do with a $5 billion coup KKR had pulled off the year before.

On Monday the Wall Street Journal’s Deal Journal carried an excerpt from the chapter “Going Public — Very Public” in King of Capital.

Private equity has always been polarizing. When it came of age in the 1980, it was linked in the public mind with the corporate raiders of that era, who launched hostile takeover bids for public companies, often arguing that they should be broken up.

Buyout (aka private equity) firms rarely made hostile bids, preferring to ally with management. But they were seen as one more force for upheaval in the economy and, indeed, when they won control of a company, they frequently sold off assets and laid off workers. They were accused of “stripping [assets] and flipping [i.e., quickly selling]” companies.

In the eyes of the buyout mavens (and corporate raiders) themselves, they were merely rescuing companies from complacent managers who weren’t stewarding their assets properly for their shareholders. Imposing more discipline on these businesses not only created profits for the buyout funds’ investors, the buyout people maintained, but created more wealth in the economy at large in the process.

The debate lives on, with books like last year’s The Buyout of America, by our friend and former Deal colleague Josh Kosman, and an on-going campaign by the Service Employees International Union (SEIU) to challenge takeovers by private equity firms. Buyout of America cover

King of Capital takes issue with their stereotypes. Private equity won’t save the economy. But neither will it destroy it, we argue. And, in fact, it can be an important alternative, transitional form of ownership that can allow a company to undergo change they could be hard to achieve under another form of ownership — particularly as a public company. Contrary to the stock criticisms, executives at private equity-owned companies say they can take a longer-term perspective, a luxury that public company managers don’t have because they have to answer to institutional investors (mutual funds, hedge funds and so on) that are focused on short-term results.

Even when private equity firms don’t improve a business, there’s nothing wrong with making a buck by buying at a trough in the market and selling at a peak, as they often do.

And the growing body of academic research, canvassing thousands of private equity investments, shows that they don’t fail at rates much different from companies in general, so the argument that private equity is bad for the economy, doesn’t hold up, we argue.

To get a flavor for the poles of the debate, compare Josh Kosman’s site and the SEIU’s with that for the industry’s lobbying group, the Private Equity Growth Capital Council (until recently the Private Equity Council).

“[A] three-dimensional portrait, which emerges from a close analysis of Blackstone’s biggest deals.” — The Wall Street Journal

[T]he book colorfully recounts the busted deals and hotheaded personalities in Blackstone’s rise to the top.”Fortune

The authors link Blackstone’s history to the larger story of private equity’s expansion and its relationship to corporate America.” — The Economist

#1 on‘s The Top Five Books for a Career in Private Equity:
[Carey and Morris] pull back the curtain on Steven Schwarzman, the CEO of Blackstone.

King of Capital has sold more than 80,000 copies in English and over 100,000 in the Mandarin edition. The book has also been translated into Japanese, Korean, Russian and Turkish.

Carey and Morris brilliantly lay out the development of the firm through an exploration of its deals – both the successful and the utterly dismal investments – and its investment team….. The book was both entertaining and educational…

The Blackstone Group was little known outside Wall Street until two events in 2007 catapulted it onto the public stage: the lavish sixtieth birthday party of its CEO Steve Schwarzman and the firm’s IPO a few months later. They advertised to the broader world what Wall Street had long known – that Blackstone had eclipsed better known private equity firms such as KKR and the Carlyle Group, both in size and profits. By then Blackstone owned all or part of fifty-one companies which together employed 500,000 people and raked in $171 million a year in revenue. more . . .