Blackstone
Understanding the private equity industry
I began my professional career in private equity, sort of. Actually I began as an associate attorney in what was then called the “venture capital group” at Kirkland & Ellis, a large Chicago law firm better known at the time for its commercial litigation practice. But this isn’t how things started out. I went to K&E to be a commercial litigator and discovered very quickly that this career path was not for me. To the firm’s credit, and my good fortune, K&E transferred me from litigation into a small group of highly skilled transactional corporate lawyers, all of whom (but for me) were either JD/CPAs or JD/MBAs. In contrast to my K&E colleagues, I had no academic background in accounting or finance, and even in law school I had not taken the right courses for someone pursuing this specialized career path. Suffice it to say that I was in totally over my head, but I had great mentors and I learned a lot on the job about the law of corporate finance and private equity. I also spent a lot of personal time (non-billable hours!) reading books on accounting, finance and corporate tax. If you think this is hard material to master while in school, try doing it on your own at 4am before the kids wake up.
I quickly fell in love with my work and I should probably not have left the practice of law, at least not when I did. K&E went on to build what is probably the country’s most successful private equity legal practice and it pains me to think that I left the firm after just three years to become an investment banker. When I was at K&E in the early 1980s, KKR was just getting going in the LBO business and the founders of Blackstone and Apollo were still young investment bankers at Lehman (Stephen Schwarzman) and Drexel (Leon Black) respectively. Madison Dearborn was still known as First Chicago Venture Capital and the founders of FCVC, Stanley Golder and Carl Thoma, had just left to start their own firm, Golder Thoma & Cressey, which subsequently morphed into several successful successor firms (GTCR and Thoma Bravo).
But I digress. This post is about Blackstone, the world’s largest alternative asset manager and a major force in today’s private equity industry. I have chosen to write about Blackstone not only because of its size and successful track record, but also because of its colorful history and the breadth of its current business operations. If one had to select a single US firm to study for the purpose of understanding the contemporary private equity and alternative asset management business, I think Blackstone would be a good choice.
I am going to keep my Blackstone comments brief, however, and recommend instead that you read this excellent article by Marc Rubinstein at Net Interest, “Blackstone’s Moment”. I know that many of you do not click through to the links I provide, but in this case I would encourage you to do so. And you might also want to check out some of the other links embedded in the Rubinstein article, a few of which I have cited in prior posts (eg Other People’s Money). If you are thinking about going into the PE business, now or later in your career, you will want to understand more than you probably do now about the historical development and current business models of various PE firms, and the Rubinstein piece on Blackstone is a good place for you to start.
As most of you already know, the PE industry is super-competitive and very difficult to break into. And this is true even for entry level jobs, which are sought out by the top finance students from the top universities (undergrad and graduate). But there are many different routes into the PE business, so don’t give up hope if you can’t find your way into PE at this point in your career. The traditional route into PE for most finance students has been via investment banking. You begin working as a corporate finance analyst at a top investment bank (often in M&A or leveraged finance), you become a whizz at financial modeling and you then interview for an associate job in PE, often skipping the traditional MBA path. This is a great way to get into PE, if you can pull it off and if you have the stamina to stick with it for several tough (but well paid) years.
But the PE industry is full of smart finance folks and what some of these firms really need are people with diverse commercial or operational backgrounds, with relevant work experience in the particular industries in which the PE firms focus (real estate, technology, energy etc). Some of you might consider this sort of non-traditional route into PE, perhaps after taking a break to get your MBA from a top school. Whatever else you might think about the top MBA programs, they are great places to retool your career path, build a personal network and find a new job.
Alternatively, you might pursue a more traditional corporate career path leading eventually to a C-suite job, maybe even as CEO or a division president. After you have finished your successful career as a senior executive, you may elect to join a PE firm as one of their operating partners, sourcing deals and providing industry insights and contacts. The pay is great and you will have plenty of time to summer in the Hamptons or on Martha’s Vineyard, unlike the lawyers and bankers who also have summer homes in these places but seem spend much of their time on zoom calls, servicing their demanding and impatient PE neighbors.
Before I leave you to read the Rubinstein piece, here are some questions that you might think about:
What exactly is “private equity” and how does it differ from other categories of “alternative assets”? Private equity is a big part of the alternative asset world, but what are some of the others? What is it that makes “alternative assets” different from traditional asset classes like stocks and bonds?
How does a firm like Blackstone differ from other large asset managers, eg BlackRock? And for a bit of corporate history trivia, what is the relationship between Blackstone and BlackRock? (No, the founders of the two firms did not study geology together in college.)
How do PE firms make money, and more specifically how do PE firm owners, investors and employees make money? Keep in mind my regular advice to “follow the money”. If you don’t know how a firm makes money, you do not really understand the firm. And if you don’t know how the CEO and other senior executives get paid, you won’t understand why the company operates the way it does. This is as true in PE as it is in other industries, possibly even more so.
What is an LBO? Yes, a Leveraged Buyout (LBO) is a form of corporate transaction, but how does it work exactly? How is an LBO structured and financed? And what are the sources of LBO “value creation” for the sponsoring PE firm? How can we distinguish a successful LBO from an unsuccessful one? What are the financial metrics of investor risk and return used to judge success?
What else do PE firms do, besides LBOs? Recall here my experience at K&E in the 1980’s, when many of the early “PE” firms concentrated on what they called “venture capital”. Recall also how Blackstone today manages not just PE funds but also many other classes of alternative assets. Within the corporate finance private equity business, how does a large LBO firm like Blackstone differ from large VC firms like Kleiner Perkins or Sequoia Capital? And where would a firm like Silver Lake fit into this picture?
What are the skill sets required of PE executives, and how can one best develop these skills? Alas, you will not find this information or advice in the Rubinstein article, but those of you from W&M can find help via the Boehly Center and by working the W&M PE network. And while you are at it, I encourage you all to learn more about Todd Boehly, W&M’96 and his very interesting (and successful) career in the PE and alternative asset management business. One could do worse than modeling oneself after Todd (Mr. Boehly to most of you).