Blackstone LP: From Private Equity to Arbitrage to Greater Fool Harvesting

To date, the title is kinda the apparent arc of Blackstone's evolving business model from this particular vantage point. Keep in mind they haven't been studied nearly as diligently as might an exceptionally well-roasted (or even raw, really) rib bone, but there've been some glimpses here and there between gnaws.

First, they started out simply enough as a private equity fund, which entity is supposed to buy undervalued or distressed assets, dress and/or fix up their deficiencies with a talented management team and newfound "synergies" (read: mass layoffs), thus unlocking their hidden value, all to resell them at some later date, however long it happens to take.

To speed things up, they got into pure arbitrage, as epitomized by their record $39B purchase and turnaround partial sales early last year of Sam Zell's Equity Office Partners. Gee, Mr. Commercial Real Estate Mogul is selling property for capital gain instead of leasing it out for cash flow? At a record-low 5.3% cap rate? Where do I line up to buy? Why? Why, so I can immediately sell it to people who would pay even more than I did, at nearly the top of the biggest baddest property/credit bubble in all of recorded history. Here's what one hatin' naysayer had to say:

If Sam sold, it must be a good time to sell...I would never want to be buying when Sam is selling.

And since that deal and others like it were so ridiculously and laughably lucrative, the great beneficent Masters of the Universe deigned to share with the great unwashed the fruits of their labor through an IPO, in which the Chinese sovereign wealth fund CIC first bought 9.9%, or $3B worth, at $30ish, then reupped recently to 12.5% at rather less lofty prices, after which the stock traipsed yet lower. How much lower? At today's $7.70, the market cap of the whole company is a scant $2B. The exact amounts of CIC's phenomenal gains and Blackstone principal Stephen A. Schwarzman's (the "Black" part of the company name) heart-wrenching losses--net of the reported $1M paid to Rod Stewart for a birthday performance--are left as an exercise for the enterprising reader.

Not that it's relevant, but there's an old joke about hedge funds: in the beginning, the general partners bring experience and the limited partners bring money, and in the end, the general partners have money and the limited partners have experience. Just sayin'...