Blackstone announced today that one of its real estate funds will buy a 65% stake in Great Wolf Resorts, Inc., which is currently controlled by Centerbridge Partners, the firm co-headed by one-time Blackstone partner Mark Gallogly.

Gallogly, who was a rising star at Blackstone in the late 1990s, pondered setting up his own shop in 1999, but Steve Schwarzman enticed him to stay by agreeing to raise a $2 billion, dedicated media and telecommunications fund that Gallogly would lead. Gallogly eventually left in 2005 to form Centerbridge. (See King of Capital, pp. 152-157, 192-193.)

Centerbridge set out to be a firm that could do well across business cycles, leading conventional buyouts in good times and making turnaround and distressed investments in downturns. It formed a real estate arm in 2017.

Steve Schwarzman’s book, What It Takes: Lessons in the Pursuit of Excellence, has certainly won its share of attention from The Wall Street Journal and other Dow Jones publications.

The book — part memoir, part a dispensing of business wisdom  — has been reviewed twice on the Journal‘s pages, and Schwarzman has given an interview to a Dow Jones private equity publication, where he warned about a growing asset bubble among early-stage, venture-funded companies.

Here are links. Subscriptions are required:

Stephen Schwarzman’s Lifelong Audacity, by Miriam Gottfried (WSJ, Sept. 13, 2019)

Book review by Daniel Akst (WSJ, Sept. 17, 2019)

Schwarzman Warns of Asset Bubble Reckoning for Investors (WSJ Pro Private Equity, Sept. 24, 2019)

Akst’s review, while generally positive, did say that King of Capital gives fuller insights into Schwarzman and his success than Schwarzman’s work, saying:

Mr. Schwarzman is well served by his ghostwriter, Philip Delves Broughton, whose handiwork is a model of clarity. Of course there’s more to any mogul’s story than a memoir is likely to retell. For a fuller picture of Mr. Schwarzman, one can always turn to “King of Capital” (2010) by David Carey and John E. Morris. Their three-dimensional portrait, which emerges from a close analysis of Blackstone’s biggest deals, presents [Schwarzman] as a driven yet risk-averse financier who has occasionally said dumb things, treated subordinates harshly and raised eyebrows with his lavish lifestyle. But he also emerges as trustworthy, tireless and even compassionate, at one point seeing to the medical treatment of a former colleague with cancer.

(Thanks, Dan. We really should meet sometime. Can we buy you a drink? 🙂 )

Our take on What It Takes after reading part way through: It’s a highly readable and pretty candid memoir, and Schwarzman goes to great lengths to recount his mistakes — not what you ordinarily expect in a CEO-author.

That was what we found interviewing him and others for King of Capital, and we concluded that this ability to acknowledge and learn from bad investments and decisions helped account for the firm’s strong record.

President Trump told U.S. diplomatic employees Thursday that he discussed with Steve Schwarzman whether Hunter Biden had helped secure $1.5 billion from the Chinese government for an investment fund.

The remarks, reported in The Washington Post, threatened to draw Schwarzman into the politically fraught investigation of Trump’s efforts to get the Ukrainian government to investigate Hunter Biden, son of Democratic presidential candidate Joe Biden.

Schwarzman, who has advised Trump on Chinese matters and has sometime functioned as a go-between with the Chinese government, issued a statement flatly denying that he’d discussed Biden with Trump.

“Steve never spoke to the President about Joe Biden or his family, nor has he had any conversations with the Chinese about Biden or his family,” the Post quoted a Blackstone spokeswoman saying.

In his remarks to the U.S. delegation to the United Nations, Trump himself suggested that Schwarzman didn’t want to be drawn in, according to the Post, which reported:

Trump said he asked Schwarzman how that could happen [that Biden could raise such a sum], and the executive responded: “Maybe I shouldn’t get involved, you know it’s very political.”

In a piece that Barron’s published today, Alexandra Scaggs explains the lush bond and loan package used to finance Blackstone’s mammoth $17 billion LBO of Thomson Reuters, which will be renamed Refinitiv:

Refinitiv’s private-equity buyers say that the leveraged buyout will leave the company with net debt that is 5.2 times the size of its earnings before interest, tax, depreciation and amortization (Ebitda). But investors say that figure is optimistic. They point to a clause buried in a sub-footnote of the offering documents, which explains that the Ebitda figure includes $650 million of cost savings that aren’t expected to be realized until “the end of the third fiscal year” after the deal is completed. Without that $650 million, the leveraged buyout will leave the company with debt 7.2 times its Ebitda for the year ended June 30, and 7.7 times Ebitda for the year ended Dec. 31.

Bond analysts have squawked at the loose covenants:

[T]wo investors said what they viewed as the worst terms in the preliminary debt contracts were left unchanged.

One of these provisions allows Refinitiv’s private-equity owners to pay themselves dividends in scenarios where a normal contract would not allow such a payment, according to Covenant Review analyst Scott Josefson. He estimated that Blackstone and the other sponsors could pay themselves $2 billion in dividends on the day of the deal under the preliminary debt documents. The covenants could also permit the owners to pre-pay unsecured bonds before the secured debt, which would normally come first, he wrote in a note.

But the offering was oversubscribed.

Carlyle Group’s new co-CEOs Kewsong Lee and Glenn Youngkin discuss how they see the market for private equity investing in this televised interview.

In a cover story this week, BusinessWeek recounts one of the most ill-fated LBOs of the mid-2000s: the $7.5 billion deal for the retailer Toys ‘R’ Us by Bain Capital, KKR and Vornado Realty Trust in 2005. The chain filed bankruptcy earlier this year.

“Bain, KKR, and Vornado, which together collected $470 million in fees and interest payments over the years, will end up losing well over a billion dollars combined,” the story reports.

Big pension funds need to raise their returns. Investing in private equity and hedge funds were two of the most popular means to do this. As hedge funds underperformed the broad markets in recent years, they fell out of favor with pension pools. Private equity firms have retained their appeal, but Calpers said this week it will attempt to make its own direct investments in private companies, bypassing the Blackstones of the world, Chief Executive Officer Marcie Frost said in an interview with Bloomberg this week.

One new strategy will focus on long-term ownership of income-producing companies, not unlike Warren Buffett’s buy-and-hold style. The other will seek out late-stage technology startups, similar to a venture capital fund. Calpers plans to more than double its annual spending on private investments, convinced public markets alone won’t meet its 7 percent return target and established private equity firms can’t fulfill all its needs.

“Putting that kind of money to work to keep our [private equity] allocation at 8 to 10 percent of the portfolio through traditional models is not possible,” … Frost said …. “So we have to look at the way we’re investing in private equity.” …

“We know we will need to build a portfolio of scale — a $40, $50, $60 billion private equity portfolio,” {Chief Investment Officer Ted}Eliopoulos said. “We don’t think we can invest at the scale we need to in the traditional offerings of private equity general partnerships. We need a number of tools in our kit.”

On factor in the proposed change is the fees and that PE firms charge on traditional funds, Frost said.

A long, catty piece in The New York Times this weekend (“Nice City You Got. I’ll Buy It.”) took jabs at Steve Schwarzman for his charitable giving, calling him “a man with more money than respect.”

The story got some basic facts wrong, however:

1. Schwarzman was not “behind the putsch that drove [his and Pete Peterson’s] enemies from power” at Lehman Brothers in 1984. It was Peterson, an investment banker who had been chairman and co-CEO of Lehman, who was the victim of a putsch the year before, in 1983. The firm’s traders, led by Lou Glucksman, pushed out Peterson – the culmination of years of fighting between Lehman’s bankers and traders. In 1984, under Glucksman, the traders ran up big losses that threatened to sink the firm and cost its partners all their invested capital. Schwarzman played an unauthorized role in soliciting a bid for Lehman that, in effect, bailed out the firm, but there was no putsch in 1984.
   King of Capital recounts the infighting, which ultimately led to Peterson and Schwarzman forming Blackstone in 1985. Ken Auletta’s excellent Greed and Glory on Wall Street (1986) is devoted entirely to the war within Lehman.
2. The article states, “Jimmy Lee, a friend of Mr. Schwarzman’s, has joked…” about Schwarzman’s gifts to Catholic charities, suggesting that Lee is still saying these things. Lee died in 2015.
3. Schwarzman’s controversial reference to Hitler’s invasion of Poland in 2010 involved the proposed tax on carried interest (profits) reaped by private equity and hedge fund managers like himself, not a tax on corporations, as the story said.

Photo from New York Times story:

Jonathan Gray, recently named Blackstone’s president and COO, is now at the head of the line of the next generation of Blackstone management, the likely successor to co-founder and CEO Steve Schwarzman. Though the firm is best known for corporate private equity, Gray rose through the ranks of the real estate group, which has earned remarkable returns for fund investors.  Real estate is now bigger and generates more profit than private equity at Blackstone.

This Bloomberg BusinessWeek story explains why Gray is getting the nod.

King of Capital gives readers the inside story of how Gray beat out Vornado in a hard-fought contest to take over Equity Office Properties in 2007, and how his team sold off many of EOP’s office towers just before the real estate market crashed. EOP turned out to be one of Blackstone’s most profitable investments ever. It and Blackstone’s purchase of the Hilton hotel chain the same year — another Gray deal — earned $20 billion in profits for Blackstone’s funds.

Blackstone announced this week that its GSO unit had raised $7 billion for a so-called “rescue debt” fund that will lend to distressed businesses, and $1.75 billion for an infrastructure secondaries fund that will buy stakes in other infrastructure funds from investor who want to sell out.

That was the good news. But The New York Times reported that Blackstone has missed fundraising deadlines for the $40 billion infrastructure fund it announced last year. Saudi Arabia’s massive Public Investment Fund agreed to match the contributions of other investors dollar-for-dollar up to $20 billion. But so far only two investors, the Pennsylvania Public School Employees’ Retirement System and the Parochial Employees’ Retirement System of Louisiana, have agreed to invest. They have committed $500 million and $75 million, respectively, the Times reported, citing data from Prequin.