This journey through the world of buy-outs and private equity and in particular Blackstone and it's co-founder and longtime driving force Steve Schwarzman, is comprehensively told by the authors David Carey and John E Morris, both experienced financial journalists. It is a very complete account of virtually (if not all) of the deals, both successes and failures undertaken by Blackstone from its start in 1985 through to fairly recently, and it explains in understandable jargon all of the 'in's-and-out's' and technicalities of the Private Equity money making merry-go-round.
The book also strives to give a balanced view on the whole business, ethics and usefulness to society of Private Equity buccaneers from Knights on White Horses riding to save ailing businesses to bloodsuckers interested only in lining their own pockets with little or no regard for others. The reader is left to make his own mind up in this respect.
However, I found that, whilst "King Of Capital" was a well researched and compiled book that was instructive as well as informative, it was perhaps a tad short of instilling a sense into the reader of the 'passion' and cut and thrust that surely must be a involved in the wheeling and dealing of company take-overs and buy-outs. Steve Schwarzman is undoubtedly some hell of a good business man and deal-maker but by the end of the book I did not feel that I 'knew' the man - perhaps this enigmatic persona is what has kept him on top of the pile?
on 4 February 2013
King of Capital, about Blackstone Capital, and it's head, Steve Schwarzman, is a great read - very underrated.
Schwarzman was at Lehman's in the 80s during the first LBO boom and formed Blackstone as a part M&A boutique, part buyout shop, with a partner in 1985. Getting business was tough at the start, before a huge run of successes applying the LBO formula, often in partnership with a customer, supplier or someone with a strategic interest in the target.
The S&L crisis and two credit crunches in the 90s stalled the debt available for periods, they occasionally didn't get the management-led improvements they sought from businesses. 2/3 of the investments Blackstone made in 2000 at the height of the market were wipeouts. (The same pattern replicated itself in 2007 when the credit markets crashed and the economy collapsed).
But the company is still worth $22b today, and the formula applied since the 80s is broadly the same, albeit improved.
And that's the interest part of the book - the mechanics and financial engineering of LBOs and private equity. If you're ever looking for investment, it pays to know what drives your buyer and what model he's got to meet.
The Mechanics of an LBO
* The buyout firm put down raised equity as a down-payment on the purchase of the target company. But the company, not the buyout firm, will borrow money. Hence buyout investors look for companies that a) produce enough cash to cover the interest on the debt, and b) are likely to increase in value. The nearest analogy is an income property where the rent covers the mortgage and expenses.
* LBO's also enjoy a generous tax break. They deduct the interest on their debt as a business expense. In most companies, this is a small percentage of earnings, but in a highly leverage buyout, the deduction can match or exceed the income, meaning the company pays little or no income tax. This amounts to a huge subsidy from the taxpayer for this form of corporate finance.
* Gibson Greeting Cards (owners of Garfield) was bought in 1982 for $80m, with just $1m of equity. At that level, they don't stand to lose much if the company fails, but can make many times their investment if they sold out at a higher price. 16 months later, the company was IPO'd for $290m. It was a great deal anyway: without leverage, they'd have made 3 times their money. With leverage, they made $210m, a 200 fold profit.
* Those are the keys: Find a cash-positive business that can be used to pay the interest. Use leverage to minimise the equity required, which multiplies the return on equity. You don't use the business to disburse profits pre-sale (although probably paying tax-deductible "management fees"), you make your money on the sale.
The Three Ways to Make Money
1. Use cash flow of the business to pay down debt, so that the sale proceeds flow to the buyer.
2. Boost cash flow through revenue increases, cost cuts or a combination to increase the cash flow and the value when the business is sold.
3. Pay down substantial debt, and reborrow against cash flow to pay the buyers a dividend.
* If you can harness buying at a low valuation (part of the economic cycle), and selling at a high valuation, whilst improving the cash flow used to make that valuation, you can make exponential returns - especially with leverage. If the reverse happens, you're in real trouble.
The Finances of their Business
* Blackstone collected 1.5% of the money raised every year, regardless of how much had been put to work. They also take 20% of the gains on investments when they're sold. In addition, companies reimburse them for the costs of analysis, plus banking and legal fees. Their initial aim was $1b in funding, averaging $250m in profits a year (25% return): $325m + fees over 5 years.
on 11 January 2011
Prior reviewers have mentioned issues with the quality of the printing. I have to reinforce those experiences. The content of the book is interesting, well written and well researched. The appearance of the book is appalling. Pages have been badly cut, the paper on which it is printed is of a very low grade and my copy has a number of misaligned pages. Not sure why the publishers would send product in this state. Detracts from the book itself.