Steve Schwarzman is the founder and face of private equity giant Blackstone. And, as a king of the buyout world, one of Schwarzman’s biggest challenges is to secure the successor to his throne.
Blackstone’s amended prospectus to its upcoming $4 billion-plus initial public offering suggests that he’s thought through this issue quite thoroughly. Other buyout barons considering their own legacies could learn a thing or two.
Blackstone’s latest prospectus reveals that Schwarzman owns about 25% of the private equity firm. That’s much less than the 40% which was widely believed to be his stake a few weeks ago, when the company first filed to go public. Moreover, he’s given a hefty chunk to his dauphin.
His deputy, Tony James, owns about 5% of Blackstone after being at the firm for only a few years.
Other buyout firms have yet to report such detailed ownership information. But the succession issue has boiled into the public arena before.
KKR, for example, lost Scott Stuart and Ned Gilhuly a couple of years ago—two long-time partners and possible successors to Henry Kravis.
At the time of their departures, it was reported widely that the duo left because Kravis and his partner/cousin George Roberts were unwilling to share the spoils of ownership sufficiently with the next generation.
Conversely, Schwarzman’s munificence is a good thing for Blackstone. He has forgone some of the bounty that his founding of Blackstone would confer to give his top dogs a reason to stick around.
This should help dispel some investors’ worries that Blackstone will be as profitable when Schwarzman retires as it is now. Whether the industry itself will ever see such a golden era, is still the question that remains unanswered.
PE firms must consult history before going public with envy
Blackstone envy is spreading like wildfire.
The private equity firm’s IPO looks set to make its founder Steve Schwarzman a billionaire eight times over. But before rivals follow suit, they should brush up on a little history. The tribulations of Narragansett Capital, a formerly listed LBO firm run by financier Arthur Little, provide an instructive tale about the challenges private equity firms face in the fishbowl of the public marketplace.
Narragansett Capital first listed shares in the 1960s. But in the early 1980s, Narragansett’s management team, some of whom later founded Providence Equity, became frustrated with the niggling hassles that accompany public ownership.
Chief among them was the need to manage earnings, an especially difficult task when, like Blackstone, your business model is predicated on producing long-term, above-market returns.
Narragansett was governed by the Investment Advisers Act of 1940, which required Narragansett to go through strict compliance rigmarole when acquiring companies. Little was quoted at the time saying these regulations were “a noose which gets tighter and tighter.” So Narragansett’s principals launched a deal to take the firm private. Though they were thwarted in these efforts by, eek, a dissident shareholder, they eventually sold the firm to Monarch Capital and its assets were liquidated. Jonathan Nelson, one of its leading lights, is now Providence’s chief.
Now, there are important differences between Narragansett and today’s LBO funds. Blackstone, for example, isn’t structured as a “40 Act” company. But the irony shouldn’t be lost on those considering whether to list shares in their buyout funds. Little’s frustrations of 20 years ago sound eerily familiar to those voiced by chief executives today about the Sarbanes-Oxley act.
Indeed, the motivations for taking Narragansett private in the 1980s mirror the ones Blackstone’s founder Steve Schwarzman cites when pitching his services to public company bosses. He says the regulations of public ownership can be burdensome and executives become slaves to quarterly earnings pressures. Amazing how quickly such sympathies can melt away at the prospect of becoming a mega billionaire.