King of Capital: Innovation Lessons from the PE World

20 Dec

In King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone, authors David Carey and John E. Morris discuss the history of the storied private equity firm and discuss what factors have enabled the company to grow from a two-man shop to an international, publicly-traded financial powerhouse. The authors address some of the most significant charges that have been trotted out against private equity and leveraged buyouts – namely the “buy it, strip it, flip it” mentality that many argue leads to job-cutting and cost-slashing, which result in weaker companies that are less likely to survive the mountains of debt accumulated during the takeover – and ultimately defend the practice, citing market data and academic research.

King of Capital is mostly a corporate biography, with a significant emphasis on the Chairman, CEO and co-founder Stephen Schwarzman, who has often been pilloried in the media for representing the excesses associated with the mountains of wealth created in the private equity business. 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. It was particularly interesting to read about the deals by Blackstone and its competitors within a broader economic context; for example, telecommunications deals that occurred during the heady days of the internet boom were discussed, as were real estate investments that occurred during the run up to the 2007-2009 financial crisis.

The book was both entertaining and educational, as the authors took pains to delve into various financial tools and functions, debating the relative merits of stock buybacks, recapitalizations, vulture investing, etc. What I wasn’t expecting from the book, however, were valuable insights regarding innovation. As it turns out, co-founders Schwarzman and Peter Peterson weren’t just savvy investors – they were innovative entrepreneurs as well.

Here are a few key takeaways around building a successful business from Blackstone, a firm that has grown its assets under management to $157.7 billion, invested in 159 separate transactions in a wide range of industries and geographies with a transaction value of over $300 billion since 1987 by maintaining a disciplined, risk-averse investment philosophy:

Maintain flexibility in your business model. Blackstone co-founders knew they wanted to jump into the world of leveraged buyouts, but they began operations by providing M&A advice, as it was a business with high-margins, little overhead and low fixed capital costs. As Blackstone’s assets under management grew, it expanded its offerings into private equity, real estate investments, and hedge fund solutions, among others.

Attract like-minded entrepreneurial types, and award them with generous stakes in the venture. As Blackstone evolved and expanded the scope of its offerings, co-founders Schwarzman and Peterson lured the most talented investors away from established firms such as Credit Suisse and Goldman Sachs by offering partial ownership of the firm.

Do what’s best for the firm, not the individual. From the beginning, proposed deals at Blackstone were vetted among the entire partnership, often many times. Partners would poke holes in the investment argument – this promoted risk-averse, well thought out investment decisions rather than people lobbying Schwarzaman to see their deals get through.

Stick to the business that you’re best at. During the internet boom when Blackstone remained on the sidelines while its competitors and other investors were making millions of dollars seemingly overnight, Schwarzman was wise to insist that “this is not what we do well,” a position that saved the firm billions when the bubble burst.

Acknowledge when additional help is required. Schwarzman realized that he was becoming a bottleneck to investment decisions, and that further growth would only occur if he relinquished much of the day-to-day management of the firm. Blackstone looked externally, and brought on Tony James as the president and COO.


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