9 REMARKS Bloomberg Businessweek March 11, 2019○ Everything was glowing at the
Davos of the private equity industry.
Can anything really go wrong?○ By Jason Kelly
Berlin’s Tegel Airport is a Cold War throwback, hailing from
the time before travelers had to go through perfume shops,
luxury stores, and immense food courts to board a flight. It’s
too small to comfortably serve the now hip and hopping cap-
ital of Germany—there aren’t that many direct flights from the
U.S.—but that doesn’t stop the crowds from coming.
And each year in late February, Tegel welcomes a partic-
ularly exclusive set of visitors: Some fly in on private jets;
others straggle in through connections, feeling ragged though
still dressed in expensive jeans and Allbirds. They’ve booked
as many as 20 back-to-back 30-minute meetings for each of
the next four days, encounters that have been described as
Wall Street speed dating. They’ve come to court the people
controlling trillions of dollars in assets, who have also arrived
in Berlin for a convention at the InterContinental Hotel. It’s
called SuperReturn International, a party of 2,500 attendees
celebrating the private equity industry—the firms that invest
in almost every big company you’ve ever heard of and are
looking to own even more.
Collectively, private equity firms manage upwards of $3 tril-
lion. Outback Steakhouse, the Weather Channel, and Neiman
Marcus have all passed through their hands, entwining the
industry in our everyday lives. Just one firm, Washington-
based Carlyle Group LP, which has controlled everything
from Hertz to AMC movie theaters, has a total of about
900,000 employees in all the companies it currently owns.
Other major players include Leon Black’s Apollo Global
Management LLC—which in 2017 raised a record-setting
$24.7 billion for its ninth fund—KKR & Co., TPG Capital, and
the biggest of them all, Blackstone Group. Blackstone expects
to reach about $20 billion when it completes the first phase
of capital-raising for its flagship fund in coming weeks. These
firms raise money from insurance companies, pension funds,
endowments, and other big investors. They amplify their buy-
ing power with borrowed money in the form of leveraged
loans and high-yield bonds. They’re well-paid for their work:
typically “2 and 20”—a 2 percent annual management fee and
20 percent of any profits. They remake the purchased com-
panies, sell them off to private buyers or take them public,
and reap the rewards.
The firms’ billionaire co-founders—Carlyle’s David
Rubenstein, KKR’s Henry Kravis, Blackstone’s Stephen
Schwarzman, and others—have emerged as statesmen-
-philanthropists, counseling presidents, making huge con-
tributions to universities (Kravis at Columbia Business
School), setting up Rhodes scholarship-like programs inChina (Schwarzman), and even renovating the Washington
Monument (Rubenstein, who’s also the host of The David
Rubenstein Show on Bloomberg TV). They also invest in the
sports world. In the NBA alone, the Philadelphia 76ers, Atlanta
Hawks, Boston Celtics, Detroit Pistons, and Milwaukee Bucks
are all owned by one or more private equity billionaires.
In Berlin, which was unseasonably sunny and warm for
winter, the mood reflected all that success and influence. The
main convention hall buzzed with interviews, as journalists
sniffed out the deals being negotiated behind closed doors,
in smaller sessions, at private dinners, and in the German
capital’s bars and nightclubs. The private equity firms were
looking for new places to invest, but they were also wooing
the endowments and institutional investors whose enor-
mous pools of cash have made the industry one of the most
important—if opaque—engines of the global economy.
What can possibly go wrong?
Pessimists point out that at the previous peak of the pri-
vate equity industry, in 2007, buyouts regularly passed the
$20 billion mark. The two biggest deals ever—Blackstone’s
buyout of Equity Office Properties Trust (an unmitigated suc-
cess) and KKR and TPG’s purchase of power company TXU
(an abject failure)—were signed that year. And then the Great
Recession set in. A few companies bought by private equity
firms, such as Toys “R” Us and Claire’s, collapsed from a com-
bination of too much debt and the weak economy. But some
buyouts survived the financial meltdown. In July 2007, as the
crisis was beginning, Blackstone bought Hilton Hotels Corp.
Today it stands as the most profitable buyout of all time, and
Hilton is publicly traded.
Successes like that ensured that private equity wouldn’t fade
away, and as the world economy recovered, the industry faced
none of the wrath and regulation directed at others on Wall
Street. Investment banks such as Goldman Sachs Group Inc.
and JPMorgan Chase & Co., which help finance private equity
deals, found themselves answering to lawmakers and subject
to a host of new regulations; they were essentially barred from
activities that put them in competition with their private equity
clients (a fund run by Goldman had been one of the owners of
TXU). Private equity firms stepped in to take up some of the
work deemed too risky for banks in their newly scrutinized
state, especially making sometimes risky loans to small and
midsize companies. Blackstone, KKR, Carlyle, Apollo (page 21),
and Ares Management all became publicly traded companies,
accelerating expansions into businesses far beyond leveraged
buyouts. More important, they continued to amass massive
war chests from investors desperate for returns better than
they were getting in public markets.
So what might cloud the sunny private equity environ-
ment? Brexit? The left wing of the Democratic Party? The
Federal Reserve? At SuperReturn, one of the concerns was
dry powder—that is, money investors had committed to pri-
vate equity companies that they haven’t used yet. As that
amount moves toward $1.5 trillion, many worry that there
KATJA RIEDEL/SNOWMAD aren’t enough good deals to absorb it. A company that starts