Next Wednesday, Steve Schwarzman turns 61 years old. That means it’s been nearly a year since his sixtieth birthday celebration became the symbol for private equity industry excess, and Schwarzman its human face. Anniversaries are a time for reflection, so let’s grab a mirrror…
There were basically two groups of critics: Those who considered a $5 million party to be obscene under all circumstances, and those who felt the obscenity was specific to a particular time and place. I was among the latter. In a February 12 column, I argued that the booming buyout business was at a precarious point, with activist shareholders beginning to believe that they could keep holding up take-private deals for higher and higher ransoms. An ostentatious display of wealth like Schwarzman’s party would only feed that beast, which would ultimately help lower private equity returns (including at Blackstone).
Several months later, the party also would be cited as a prompt for Congressional interest in changing the tax treatment of carried interest. While it’s unfair to suggest that Schwarzman should have – or could have – considered that specific point, the general message from my column still applied: Don’t draw attention to yourself.
This message also seems to have been imparted to Schwarzman by Blackstone co-founder Pete Peterson, according to a new Schwarzman profile in The New Yorker. He didn’t listen, but does provide a more sympathetic explanation for his extravagance. Seems he has a rare blood-protein deficiency, which requires regular checkups and medication. The party, he said, was a reflection of his joy at making it to 60. Fine, but he still could have used better judgment – perhaps going the Bonderman in Vegas route, where nobody notices a massive party.
But here’s the thing, and it really is unavoidable: Shareholder activism did not end up playing an enormous role in inflated deal values between February and June. There were certainly a couple of transactions in which that was the case, but the biggest ones actually occurred before Rod Stewart began crooning Happy Birthday. Yes deal prices were inflated, but that was mostly due to: (A) A bull public market driven by the belief that PE firms planned to buy up everything; and (B) Competition between private equity firms. Perception of wealth did help duel A, but the larger driver was actual PE deal activity and bank leaks about companies on the auction block.
Increased PE visibility did indeed drive Congressional interest in changing carried interest tax treatment but, as of now, no such action has been taken. The Baucus-Grassley Bill also did not receive a vote. Maybe in 2009 if we get a Democratic president and Congress, but this is a reflection column, not a prediction column. There also has been the SEIU scrutiny, but so far it’s been more sideshow than substance.
Finally, increased PE visibility did not help cause the credit crunch that seems to be leading us down a recessionary path. PE firms were certainly part of the problem, but lenders deserve the bag they’re holding.
So no party-planning advice this year. I still don’t believe Schwarzman gave more than a moment’s thought to any of the above issues, but perhaps that would have been time wasted.