The New Kings of Capitalism

In two decades, private-equity firms have moved from the outer fringe to the center of the capitalist system. Can they keep it up?

“If you made ‘Private Equity: the Movie’, then Michael Douglas would have to play Schwarzman.” The head of one multibillion-dollar private-equity firm is talking about the head of another, the Blackstone Group’s Steve Schwarzman. “I’m joking,” he adds quickly, “Steve and I are good friends.” Perhaps he realizes that comparisons with the fictional Wall Street banker famously portrayed by Mr. Douglas, Gordon “greed is good” Gekko, are not what his industry needs just now. In fact, Hollywood has already set its sights on the men who run this enormous, relatively unaccountable pool of capital. This year, the Carlyle Group, a huge private-equity firm, has been vilified in Michael Moore’s film “Fahrenheit 9/11″, as well as being named as the inspiration for a fictional private-equity firm that tries to install its brainwashed candidate as American president in the remake of “The Manchurian Candidate”.

Yet to study firms such as Blackstone is as good a way as any to find out what is going on at the sharp end of capitalism today. Hedge funds may be sexier, at least for now, but it is surely Mr. Schwarzman and his peers in the private-equity industry who control the really smart money and wield the lasting influence.

In 1985, when Blackstone was founded by Mr. Schwarzman and Pete Peterson, a former commerce secretary under Richard Nixon, private equity was a cottage industry that few people had heard of. There had always been family-owned private firms, but family owners did not usually aim to sell off the business; they passed it on to the next generation.

Until the late 1970s, the main activity in private equity — buying shares in private companies in the hope of selling them at a higher price later — had been carried out mostly by the investment arms of a few wealthy families, such as the Rockefellers and Whitneys in America, and had generally been confined to venture-capital investment in small, fast-growing businesses. America’s venture capitalists have become the envy of the world for developing firms such as Intel and Google from nothing more than a bright idea into big, successful companies. But these days less than one-fifth of the money the industry raises goes on providing venture capital for young firms. Much the larger part of private-equity money is spent on buy-outs of established companies.

The first of today’s big private-equity firms, Warburg Pincus, was formed only in the late 1960s, and had to raise money from investors one deal at a time. By the late 1980s private equity had grown big enough to be noticed by the general public, but it made hostile headlines with a wave of debt-financed “leveraged buy-outs” (LBOs) of big, well-known firms. The industry was cast in the role of irresponsible “corporate raider” attacking from the wilder fringes of capitalism. A bestselling book by Bryan Burrough and John Helyar about the $25 billion battle in 1988 for RJR Nabisco branded two private-equity firms, Forstmann Little and Kohlberg Kravis Roberts (KKR), as “Barbarians at the Gate”.


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