A nice history of private equity over the last thirty years or so, focusing mainly on Blackstone and Steve Schwarzman. As Blackstone hasn’t gone bust, or been taken over by another firm, there is a lot less drama than other books on other firms, and this book can be pretty slow at times. However, this is also more encouraging in that Blackstone didn’t have idiotic hires and management decisions placing unqualified and untested individuals in positions to do massive damage and then failing to have any kind of serious oversight on the individuals (like Merrill Lynch and Bear Stearns). It is nice to encounter competence occasionally, even if all leveraged buyouts were not successful. And not all, but many companies did far better after being taken over.

One of the key take-aways for me was the evolving nature of capital available for PE. Initially every LBO was financed on its own, frequently from the insurance industry. Then with the advent of junk bonds (Michael Milken and Drexel Burnham & Lambert) which replaced investments from insurance, the capital became more readily available. Later investment funds were created which allowed smaller investors were able to participate for the first time, and Blackstone eventually went public. The industry went from searching for funding for every single deal, to searching for enough deals to utilize all the capital they had at their disposal. This then affects the price as the market for LBOs was in a shortage, the price of the firms rises to meet up with demand. Which is where the LBO market was prior to the financial crisis.

PE has done fairly well during the crisis, especially considering how both commercial and investment banking did. Very little debt needed to be rolled over during the crisis, which was beneficial for the industry as credit was extraordinarily tight during that time. And since PE was doing better than other investments, investors rebalanced their portfolios they were shedding PE investments to bring them back in line. Most of the debt will come due in the next few years, so it will be interesting to see how that unfolds. Especially as the assets have lost value in the meantime. But this also happened to the industry in the late 80’s, early 90’s with that credit crunch, though the current downturn is much worse.