How the Wiley Chinese Turned Out to Be Wile E. Coyote
November 7, 2008
In March 2007 the Sovereign Wealth Fund of China invested $3 billion to buy 9.9% of the Blackstone Group, just before it went public. You can see how well that investment has done since then.
The Blackstone Group is going public to raise billions of dollars. "Look," it says to the rubes, yahoos, and lumpen capitalists, "We can get you alpha; buy our shares."But the Blackstone Group is not a religious or charitable order. They are not going to give away alpha. Nor are they innumerate; they can do the math. The only circumstance in which they would possibly sell their shares to the public was if they felt their alpha was over-estimated by the share-buying public...or, they didn't have any alpha.
What is happening to private equity is what has happened to hedge funds...and what happens to everything else in the markets...and indeed, to the rest of life. Alpha - the extraordinary, the special, the above-market - is in short supply. And the more people chase after it, the harder it is to get.
The multibillionaire CEO of the Blackstone Group, Stephen Schwarzman, was George W. Bush's roommate in college. He is also a fellow member of Skull & Bones. He achieved notoriety when his wife threw a multimillion dollar birthday party for him a month before the deal with China. This prompted one anonymous commentator to summarize an entire era.
All the trappings have begun to raise questions about how much Schwarzman craves recognition as No. 1 in the world he helped create. "You wouldn't have a party for 500 people or buy trophy properties in Palm Beach or on Park Avenue if you didn't relish the notoriety," says one longtime Wall Streeter. What Schwarzman has always wanted, says a former colleague, is "to be Henry Kravis and Bruce Wasserstein rolled into one. But you've got to give him credit. There's always somebody who is the symbol of an era, and he hit this era right."
That era has died.
Blackstone held the mortgage on World Trade Center Building 7, which collapsed without being hit by a plane a year later. Here is its press release from 2000.
The sovereign wealth fund of China got in at the top. The owners sold out at the top. Should anyone be surprised?
The hundreds of billions of dollars in sovereign wealth funds are invested by people who have never made a profit in their lives. Call it on-the-job training.
On August 13, 2007, on the 25th anniversary of the Dow's bottom at 777, I wrote this: "On Getting Out at the Top: The Blackstone Group."
I recommended getting out of stocks. The Dow was at 14,000.
My opinion has not changed.