Steve Schwarzman, co-founder and CEO of the Blackstone Group, is the kind of oversized billionaire spendthrift that only Hollywood -- or in this case, Wall Street -- could create. For his 60th birthday party, the so-called "King of Wall Street" threw himself multi-million dollar bash starring Martin Short, Rod Stewart and Patti LaBelle leading an entire church choir singing "He's Got the Whole World in His Hands" [source: Gross].
Blackstone is a private equity firm specializing in leveraged buyouts (LBO), or hostile takeovers. Schwarzman and his business partner Peter G. Peterson have been buying and flipping struggling companies since the 1980s with the help of lots of cheap, available debt. The typical LBO purchase is 10 percent cash and 90 percent debt.
Private equity firms are notoriously… well, private. So it surprised many investors when Blackstone announced plans to go public in 2007. Unfortunately, in the rush to get a piece of this Wall Street wonder -- Blackstone's funds have averaged a 23 percent annual return since 1987, twice the S&P 500 average -- investors overlooked the odd details of the deal [source: Jubak].
First of all, the company being offered was a spinoff of the Blackstone Group called Blackstone Holdings. This spinoff didn't represent the vast earnings of Blackstone's investments, only the chunk of the company that managed those investments. Blackstone Holdings only took in $2.3 billion a year in fees, but the IPO underwriters still valued it at $40 billion [source: Jubak].
But the biggest problem -- and something that Schwarzman and his Blackstone insiders undoubtedly foresaw -- was that the bottom was about to drop out of the credit market, drying up the easy debt needed to make LBOs. In the IPO prospectus, Blackstone warned of uneven earnings over the next couple of months or years, but few people paid attention.
The result: Blackstone raised $4.1 billion with the IPO, Schwarzman and his co-founder Peter G. Peterson pocketed $2.6 billion, and investors ended up with a stock that lost 42 percent of its value during its first year [source: Kelly]. More than two years later, the stock is still trading between $10 and $15, less than half of its $31 IPO price.