The Curmudgeon - H U M O R

August 09, 2007

David Blitzer

Private thoughts on private equity.


It was a fitful night. A day spent on the Hill chasing down legislators left me exhausted, yet I couldn't hold a snooze for more than two hours at a time. In the small hours of the morning, I found myself questioning the fruitfulness of my venture. After all, Congress was talking about raising taxes on private equity outfits, just when the bubble seemed to have sprung a leak.

I tossed and turned. In my on-again-offagain reveries, I kept seeing that chart showing the Red Rocks Listed Private Equity Index—the benchmark tracked by the PowerShares private equity exchange-traded fund (ETF) (AMEX: PSP)—handily outrunning the S&P 500 over the past six years. The index racked up an average annual gain of 19.5 percent through the first quarter versus the S&P's anemic 1.2 percent return.

But when my mind's eye zoomed into recent history, the picture wasn't nearly so attractive. Just as the Blackstone initial public offering (IPO) was pushed to market, private equity's fortunes reversed. Through the third week in June, PSP had swung to an annualized 15.5 percent gain from its October 2006 launch, compared to the 13.8 percent annualized return on the S&P 500. Then, wheels started wobbling. PSP's sinceinception performance went to a discount against the S&P on June 22, and has stayed there ever since. The discount, in fact, is growing in favor of the blue chips. By mid- July, PSP was underperforming the S&P by 2.5 percent.

As I dozed, I wondered how Blackstone chairman Stephen Schwarzman was sleeping. Hadn't I seen a news item today that he'd come to Washington himself to palaver with the poobahs?

Twilight sleep is a strange state. Like floating through a Dali landscape, one can't be sure what is real. Perfectly plausible happenstance in the dim of night seems wildly outlandish when recollected in the light of day.

The news item announcing Schwarzman's visit was headlined: "Blackstone Chief Bids For Congress."

Wow, I thought, all the money stuffed into Schwarzman's wallet from the IPO must have caused a thrombosis. What sort of cerebrovascular compromise must you suffer to make you think running for Congress is a better deal that pulling down $400 million a year from a private equity outfit?

But I had it wrong. The story read: "In a dramatic parry to legislative calls for higher taxes, Blackstone Group chairman Stephen Schwarzman offered to buy Congress today for $651 million. ‘It's a damn good deal, ‘Schwarzman says. ‘That's a buyout worth two terms for every representative and senator plus a 34-percent premium. If I'd make an offer to shareholders like that, it'd be snapped up pronto."

Schwarzman wasn't running for Congress. He wanted to run Congress. Heaven knows he had enough money to pull it off, too. He'd taken down about $800 million from the IPO.

Offering to buy Congress is a bold move, even for Schwarzman. But they teach ‘em to think BIG at Harvard and Yale. Synapses sizzling, I recalled that Schwarzman was a Yale classmate of President George W. Bush and went on, like the President, to get his MBA from Harvard.

Of course, Schwarzman has been thinking big ever since Blackstone became the most enviable player on the private equity sandlot. And, to paraphrase SNL's Garrett Morris as Chico Escuela, private equity's been "bery, bery good" to Schwarzman.

It was thoughts about faux baseballer Escuela that brought to mind a recollection of President Dubya owning an interest in the Texas Rangers. Turning a $606,000 stake into $15 million in just five years earned him the equivalent of a 475 percent annual gain. If Schwarzman deals Congress like the Prez dealt the Rangers, the next bidder's going to have to pony up $15.5 billion for naming rights to the Heap on the Hill.


The din of the alarm clock was followed by my wife cheerily chirping, "Time to stop dreaming and face reality."

Yeah … right! I gotta stop eating jalapeño burgers just before bedtime.

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