Blackstone Group

The Blackstone Group L.P. (NYSE: BX) is an American-based alternative asset management and financial services company that specializes in private equity, real estate, and credit and marketable alternative investment strategies, as well as financial advisory services, such as mergers and acquisitions (M&A), restructurings and reorganizations, and private placements.^[2]

Blackstone's private equity business has been one of the largest investors in leveraged buyout transactions over the last decade, while its real estate business has actively acquired commercial real estate. Since its inception, Blackstone has completed investments in such notable companies as Hilton Worldwide, Equity Office Properties, Republic Services, AlliedBarton, United Biscuits, Freescale Semiconductor and Travelport.^[3]

Blackstone was founded in 1985 as a mergers and acquisitions boutique by Peter G. Peterson and Stephen A. Schwarzman, who had previously worked together at Lehman Brothers, Kuhn, Loeb Inc. Over the course of two decades, Blackstone has evolved into one of the world's largest private equity investment firms. In 2007, Blackstone completed a $4 billion initial public offering to become one of the first major private equity firms to list shares in its management company on a public exchange.^[4][5] Blackstone is headquartered at 345 Park Avenue in New York City, with eight additional offices in the United States and offices in London, Paris, Düsseldorf, Sydney, Tokyo, Hong Kong, Beijing, Shanghai, Mumbai and Dubai.

Business segments

The firm is organized into four business segments:^[2]

• Corporate private equity - Management of Blackstone's family of private equity funds investing in leveraged buyout transactions;
• Real Estate - Management of Blackstone's family of real estate investment funds;
• Marketable Alternative Asset Management - Management of Blackstone's funds of hedge funds, mezzanine funds, senior debt vehicles, and closed-end mutual funds; and
• Financial Advisory - Includes Blackstone's mergers and acquisitions advisory services, restructuring and reorganization advisory services and fund placement services for alternative investment funds.

Corporate private equity

As of 2011, Blackstone is the world's fifth-largest private equity firm by committed capital and focuses primarily on leveraged buyouts of more mature companies.^[4] The firm also invests through minority investments, corporate partnerships and industry consolidations and occasionally, start-up investments in new entrants into existing industries. The firm focuses on friendly investments in large capitalization companies.^[2]

Blackstone's private equity business employs approximately 120 investment professionals in New York City, London, Menlo Park, Mumbai, Hong Kong, and Beijing.^[3]

Historically, Blackstone has primarily relied on private equity funds, pools of committed capital from pension funds, insurance companies, endowments, fund of funds, high net worth individuals, sovereign wealth funds and other institutional investors.^[6] As of the end of 2008, Blackstone had completed fundraising for six funds with total investor commitments of over $36 billion, including five traditional private equity fund and a separate fund focusing on telecommunications investments.

Following is a summary of Blackstone's private equity funds raised from its inception through the beginning of 2009:^[7]

From 1987 to the time of its IPO filing in 2007, Blackstone invested approximately $20 billion in capital in 109 private equity transactions.^[2]

Blackstone's most notable investments include Allied Waste,^[8] AlliedBarton Security Services, Graham Packaging, Celanese, Nalco, HealthMarkets, Houghton Mifflin, American Axle, TRW Automotive, Catalent Pharma Solutions, Prime Hospitality, Legoland, Universal Studios Parks, Madame Tussauds,^[9] La Quinta, Luxury Resorts (LXR), Pinnacle Foods, Hilton Hotels Corporation, Apria Healthcare, Travelport, The Weather Channel (United States) and (in 2009) The PortAventura Resort.^[10]

Real estate

Blackstone began building its real estate investment business in 1992 with the acquisition of a series of hotel businesses and has built it into a global operation with 122 investment professionals in the United States, Europe and Asia. The real estate business has raised approximately $28 billion for a variety of fund vehicles including: six US-focused funds and three International opportunity funds. Blackstone also raised a real estate special situations fund focusing on non-controlling debt and equity investment opportunities. The special situations fund invests directly in real estate as well as private and publicly traded real estate-related securities.^[2][11]

The following is a summary of Blackstone's real estate funds raised from inception through November 2009:^[7]

From 1987 through the time of its IPO filing in 2007, Blackstone invested more than $13 billion in 212 real estate transactions and is a major owner of real estate throughout the US and Europe.^[2] Among Blackstone's most notable real estate investments have included Equity Office Properties, Hilton Hotels Corporation, Trizec Properties, Center Parcs UK, La Quinta Inns & Suites, Wyndham Worldwide, Southern Cross Healthcare.^[12]

The purchase and subsequent profitable IPO of Southern Cross has led to controversy in the UK. Part of the purchase involved splitting the business into a property company, NHP, and a care home business, which Blackstone claimed would become "the leading company in the elderly care market." In May 2011, Southern Cross, now independent, was almost bankrupt, jeopardising 31,000 elderly residents in 750 care homes. Although it denies blame, Blackstone was widely accused in the media for selling on the company with an unsustainable business model and crippled with an impossible sale and leaseback strategy.^[13][14]

Marketable alternative asset management

In 1990, Blackstone created fund of hedge funds business to manage the internal assets for Blackstone and its senior managers. Over the years, this business evolved into Blackstone's marketable alternative asset management segment, which was opened to institutional investors. Among the investments included in this segment are funds of hedge funds, mezzanine funds, senior debt vehicles, proprietary hedge funds and closed-end mutual funds.^[2]

In March 2008, Blackstone acquired GSO Capital Partners, a leading credit-oriented alternative asset manager, for $620 million in cash and stock and up to $310 million through an earnout over the next five years based on certain earnings targets. The combination of Blackstone and GSO created one of the largest credit platforms in the alternative asset management business, with over $21 billion of total assets under management.^[15] GSO was founded in 2005 by Bennett Goodman, Tripp Smith and Doug Ostrover. The GSO team had previously managed the leveraged finance businesses at Donaldson, Lufkin & Jenrette and later Credit Suisse First Boston, after the acquisition of DLJ. Blackstone had existing relationships with the GSO team as an original investor in GSO's funds. Following the completion of the acquisition, Blackstone merged GSO's operations with its existing debt investment operations.^[16][17]

Financial advisory services

Blackstone's financial advisory business is composed of three businesses:^[2]

• Corporate and Mergers and Acquisitions Advisory
• Restructuring & Reorganization Advisory
• Private Placement Advisory

Blackstone was originally founded by Peterson and Schwarzman in 1985 as a boutique investment banking firm that provides mergers and acquisitions advisory services. Among Blackstone's most notable corporate and mergers and acquisitions, advisory clients include Microsoft, Procter & Gamble, Verizon, Comcast, Sony and AIG.^[18][19]

In 1991, with the collapse of the 1980s buyout boom, Blackstone began to offer advisory services in corporate restructurings as well. Blackstone's most notable restructuring clients have included General Motors^[20] Xerox, Enron, Bally Total Fitness and Global Crossing.

Blackstone's fund placement advisory group, The Park Hill Group, was formed in 2005 with a team of professionals from Atlantic-Pacific Capital and Credit Suisse. The group focuses on raising capital from institutional investors for private investment vehicles that invest in private equity, mezzanine, real estate, venture capital, and hedge funds.^[21] Park Hill Group also provides secondary advisory services to investors seeking portfolio liquidity and unfunded commitment relief. ^[22]

History

Founding and early history

The Blackstone Group was founded in 1985 by Peter G. Peterson and Stephen A. Schwarzman with $400,000 in seed capital.^[23][24] The founders named their firm Blackstone, which was a cryptogram derived from the names of the two founders (Schwarzman and Peterson): Schwarz is German for black; Peter, or Petra in Greek, means stone or rock.^[25] The two founders had previously worked together at Lehman Brothers, Kuhn, Loeb Inc. At Lehman, Schwarzman served as head of Lehman Brothers' global mergers and acquisitions business.

Prominent investment banker Roger C. Altman, another Lehman veteran, left his position as a managing director of Shearson Lehman Brothers to join Peterson and Schwarzman at Blackstone in 1987. In 1992, after playing a role in the firm's growth, Altman would leave Blackstone to join the Clinton Administration as Deputy Treasury Secretary. After leaving politics in 1996, Altman would found a boutique investment banking and private equity firm, Evercore Partners.^[26][27]

Blackstone was originally formed as a mergers and acquisitions advisory boutique. Blackstone advised on the 1987 merger of investment banks E. F. Hutton & Co. and Shearson Lehman Brothers, collecting a $3.5 million fee.^[28][29] The firm also advised CBS Corporation on its 1988 sale of CBS Records to Sony to form what would become Sony Music Entertainment.^[30]

From the outset in 1985, Schwarzman and Peterson planned to enter the private equity business, but had difficulty in raising their first fund because neither had ever led a leveraged buyout.^[31] Blackstone finalized fundraising for its first private equity fund in the aftermath of the October 1987 stock market crash. After two years of providing strictly advisory services, Blackstone decided to pursue a merchant banking model after its founders determined that many situations required an investment partner rather than just an advisor. The largest investors in the first fund included Prudential Insurance Company, Nikko Securities and the General Motors pension fund.^[32]

Blackstone also ventured into other businesses, most notably investment management. In 1987, Blackstone entered into a 50–50 partnership with the founders of BlackRock, Larry Fink and Ralph Schlosstein. The two founders, who had previously run the mortgage backed securities divisions at First Boston and Lehman Brothers Kuhn Loeb respectively, initially joined Blackstone to manage an investment fund and provide advice to financial institutions. They also planned to use a Blackstone fund to invest in financial institutions and help build an asset management business specializing in fixed income investments.^[2][33]

As the business grew, Japanese bank Nikko Securities acquired a 20% interest in Blackstone in 1988 for a $100 million investment in 1988 (valuing the firm at $500 million). Nikko's investment allowed for a major expansion of the firm and its investment activities.^[34] The growth firm also recruited politician and investment banker David Stockman from Salomon Brothers in 1988. Stockman led many key deals in his time at the firm, but had a mixed record with his investments.^[35] He left Blackstone in 1999 to start his own private equity firm, Heartland Industrial Partners, based in Greenwich, Connecticut.^[36][37]

In June 1989, Blackstone acquired freight railroad operator, CNW Corporation.^[38] That same year, in 1989, Blackstone partnered with Salomon Brothers to raise $600 million to acquire distressed thrifts in the midst of the Savings and loan crisis.^[39]

1990s

As the 1990s began, Blackstone continued its growth and expansion into new businesses. In 1990, Blackstone launched its fund of hedge funds business, initially intended to manage investments for Blackstone senior management. Also in 1990, Blackstone extended its ambitions to Europe, forming a partnership with J. O. Hambro Magan in the UK and Indosuez in France. In 1991, Blackstone created its Europe unit to enhance the firm’s presence internationally.^[40][41]

In 1991, Blackstone launched its real estate investment business with the acquisition of a series of hotel businesses under the leadership of Henry Silverman. In 1990, Blackstone and Silverman acquired a 65% interest in Prime Motor Inn’s Ramada and Howard Johnson franchises for $140 million, creating Hospitality Franchise Systems as a holding company.^[42] In October 1991, Blackstone and Silverman added Days Inns of America for $250 million.^[43] Then, in 1993, Hospitality Franchise Systems acquired Super 8 Motels for $125 million.^[44] Silverman would ultimately leave Blackstone to serve as CEO of HFS, which would later become Cendant Corporation.

Blackstone made a number of notable investments in the early and mid 1990s, including Great Lakes Dredge and Dock Company (1991), Six Flags (1991), US Radio (1994), Centerplate (1995), MEGA Brands (1996). Also, in 1996, Blackstone partnered with the Loewen Group, the second largest funeral home and cemetery operator in North America, to acquire funeral home and cemetery businesses. The partnership's first acquisition was a $295 million buyout of Prime Succession from GTCR.^[45][46][47]

Through the mid and late 1990s, Blackstone continued to grow. In 1997, Blackstone completed fundraising for its third private equity fund, with approximately $4 billion of investor commitments^[48] and a $1.1 billion real estate investment fund.^[49] In the following year, in 1998, Blackstone sold a 7% interest in its management company to AIG, replacing Nikko Securities as its largest investor and valuing Blackstone at $2.1 billion.^[50] Then, in 1999, Blackstone launched its mezzanine capital business. Blackstone brought in five professionals, led by Howard Gellis from Nomura Holding America's Leveraged Capital Group to manage the business.^[51]

Blackstone's investments in the late 1990s included AMF Group (1996), Haynes International (1997), American Axle (1997), Premcor (1997), CommNet Cellular (1998), Graham Packaging (1998), Centennial Communications (1999), Bresnan Communications (1999), PAETEC Holding Corp. (1999). Haynes and Republic Technologies International, a specialty steel maker in which Blackstone invested in 1996, both had problems and ultimately filed bankruptcy.^[52]

Also, in 1997, Blackstone made its first investment in Allied Waste. Two years later, in 1999, Blackstone, together with Apollo Management provided capital for Allied Waste's acquisition of Browning-Ferris Industries in 1999 to create the second largest waste management company in the US. Blackstone's investment in Allied was one of its largest to that point in the firm's history.^[8]

Its investments in telecommunications businesses—four cable TV systems in rural areas (TW Fanch 1 and 2, Bresnan Communications and Intermedia Partners IV) and a cell phone operator in the Rocky Mountain states (CommNet Cellular) were among the most successful of the era, generating $1.5 billion of profits for Blackstone's funds.^[53]

Early 2000s

In July 2002, Blackstone completed fundraising for a $6.45 billion private equity fund, Blackstone Capital Partners IV, the largest private equity fund ever raised to that point. More than $4 billion of the capital was raised by the end of 2001 and Blackstone was able to secure the remaining commitments despite adverse market conditions.^[55]

With a significant amount of dry powder in its new fund, Blackstone was one of a handful of private equity investors capable of completing large transactions in the adverse conditions of the early 2000s recession. At the end of 2002, Blackstone, together with Thomas H. Lee Partners and Bain Capital, acquired Houghton Mifflin Company for $1.28 billion. The transaction represented one of the first large club deals, completed since the collapse of the Dot-com bubble.^[56]

In late 2002, Blackstone remained active acquiring TRW Automotive in a $4.7 billion buyout, the largest private equity deal announced that year (the deal was completed in early 2003). TRW's parent was acquired by Northrop Grumman, while Blackstone purchased its automotive parts business, a major supplier of automotive systems.^[57][58] Blackstone also purchased a majority interest in Columbia House, a leading music club, in mid 2002.^[59]

Blackstone made a significant investment in Financial Guaranty Insurance Company (FGIC), a leading monoline bond insurer alongside PMI Group, The Cypress Group and CIVC Partners. FGIC has suffered, along with the other leading bond insurers in the 2008 credit crisis.^[60]

Two years later, in 2005, Blackstone was one of seven private equity firms involved in the buyout of SunGard in a transaction valued at $11.3 billion. Blackstone's partners in the acquisition were Silver Lake Partners, Bain Capital, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts, Providence Equity Partners, and Texas Pacific Group. This represented the largest leveraged buyout completed since the takeover of RJR Nabisco at the end of the 1980s leveraged buyout boom. Also, at the time of its announcement, SunGard would be the largest buyout of a technology company in history, a distinction it would cede to the buyout of Freescale Semiconductor. The SunGard transaction is also notable in the number of firms involved in the transaction, the largest club deal completed to that point.^[61] The involvement of seven firms in the consortium was criticized by investors in private equity who considered cross-holdings among firms to be generally unattractive.^[62][63]

In 2006, Blackstone launched its new long / short equity hedge fund business, Kailix Advisors. According to Blackstone, as of September 30, 2008, Kailix Advisors had $1.9 billion of assets under management. In December 2008, Blackstone announced that Kailix will be spun off to its management team to form a new fund as an independent entity backed by Blackstone.^[17]

While Blackstone was active on the corporate investment side, it was also busy pursuing real estate investments. Blackstone acquired Prime Hospitality^[64] and Extended Stay America in 2004. Blackstone followed these investments with the acquisition of La Quinta Inns & Suites in 2005 and its largest transaction, the buyout of Hilton Hotels Corporation in 2007. Extended Stay Hotels was sold to The Lightstone Group in July 2007 and Prime Hospitality's Wellesley Inns were folded into LaQuinta.^[65]

The Buyout Boom (2005-2007)

During the buyout boom of 2006 and 2007, Blackstone completed some of the largest leveraged buyouts. Blackstone's most notable transactions during this period include the following:

Initial public offering in 2007

In 2004, Blackstone had explored the possibility of creating a business development company (BDC), Blackridge Investments, similar to vehicles pursued by Apollo Management.^[87] However, Blackstone failed to raise capital through an initial public offering that summer, and the project was shelved.^[88] It also planned to raise a fund on the Amsterdam stock exchange in 2006, but its rival, Kohlberg Kravis Roberts & Co. launched a $5 billion fund there that soaked up all demand for such funds, and Blackstone abandoned its project.^[89]

By the summer of 2006, Blackstone had a more ambitious goal and secretly began laying the groundwork for an IPO of the firm itself, and managed to keep the project quiet for eight or nine months.^[4][90] On March 22, 2007, Blackstone filed with the SEC^[2] to raise $4 billion in an initial public offering. On June 21, Blackstone sold a 12.3% stake in its ownership for $4.13 billion in the largest U.S. IPO since 2002. Traded on the New York Stock Exchange under the ticker symbol BX, Blackstone priced at $31 per share on June 22, 2007.^[5][91] Less than two weeks after the Blackstone IPO, in July 2007 rival private equity firm, Kohlberg Kravis Roberts, filed with the SEC^[92] In October 2009, KKR listed its shares on the Euronext exchange and anticipates a listing on the New York Stock Exchange.^[93]

Since 2008

Since the closure of the credit markets in 2007 and 2008, Blackstone has managed to close only a small number of sizable transactions. In January 2008, Blackstone made a small co-investment alongside TPG Capital and Apollo Management in their buyout of Harrah's Entertainment, although that transaction had been announced during the buyout boom period. Other notable investments that Blackstone completed in 2008 and 2009 included AlliedBarton, Performance Food Group,^[94][95] Apria Healthcare and CMS Computers.

Among the firm's two largest investments since the buyout boom have been The Weather Channel and the announced acquisition of Busch Entertainment. In July 2008, Blackstone, together with NBC Universal and Bain Capital agreed to purchase The Weather Channel from Landmark Communications.^[96][97] In October 2009, Anheuser-Busch InBev announced the sale of its Busch Entertainment Corporation theme parks division to Blackstone for $2.7 billion.^[98][99]

The Financial Times has reported that Merlin Entertainments owned by Blackstone Group will file an IPO^[100] in the 2nd quarter of 2010. Merlin will be listed on the London Stock Exchange. If true this would be the second of 8 reported IPOs Blackstone Plans,^[101] the first being Team Health Holdings, Inc.^[102] Blackstone reported at the end of 2009 revenues of $1.8bln, compared to -$349mln revenues in 2008.^[103] On August 13, 2010 Blackstone announced it would buy Dynegy, an energy firm, for nearly $5 billion.^[104]

In 2010, Blackstone Alternative Asset Management, received Institutional Investor magazine's 8th Annual Hedge Fund Industry award for Large Fund of Hedge Funds of the Year.^[105]

February 2011: Blackstone Group LP agreed to acquire 588 malls of Centro Properties Group's U.S. shopping centers for $9.4 billion. Whereas Centro's Australian may continue their operation independently.^[106]

August 2011: Blackstone Group LP agreed to buy Medical-Biller Emdeon Inc. for around $3 billion. Due to Blackstone Group LP was (the world's biggest) private-equity firm, so tender offer of Emdeon Inc. public company should be done with a cash payment of $19 a share, a 44 percent premium.^[107]

Blackstone has moved some of its accounting functions to India

Further reading

• David Carey, John E. Morris (2010). King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone.

See also

• GSO Capital Partners
• Stephen A. Schwarzman
• List of outdoor industry parent companies

References

External links

• The Blackstone Group (company website)