How bad is the reputation of private equity? Months after private equity companies began to back away from deals that no longer seem promising in our credit crunched world, the Royal Bank of Scotland has told many of the biggest private equity firms they aren’t welcome in the first round of the auction of the bank’s insurance business, according to the Financial Times reports.

Kohlberg Kravis Roberts, Blackstone and Apax Partners had reportedly planned to bid in the auction, but were told by RBS that they were being excluded. Exclusion from the auction is widely being interpreted as demonstrating a clear vote of no-confidence in the ability of private equity buyers to secure financing necessary to close acquisitions.

RBS spurns buy-out groups [Financial Times]

“How do you get from here to the rest of the world?”

The question is one of the most heart-breaking moments on this season of the Wire. It’s asked of Cutty, an ex-con turned proprietor of a neighborhood boxing gym. The youngster asking it is Dukie, of the desperate kids caught up in the mess of youthful drug dealing but who is told by friend and foe alike that his talents lie elsewhere. “I wish I knew,” is Cutty’s humble answer.

One guy who might know is Steve Schwarzman, the billionaire head of private equity giant Blackstone. And last week he went to the Sacred Heart School in the Bronx to deliver his answer. Unlike conventional advice—that it was important to work hard at school and stay out of trouble—Schwarzman seemed to propose that doing well in school isn’t all it is cracked up to be.

Apparently a quiet night at home in the largest living room in Manhattan wasn’t cutting it for Stephen Schwarzman. His birthday celebration was certainly toned down from the multimillion bash at the Armory the year before. But he still managed to make it out for the night with his wife Christine Schwarzman. The couple was spotted by spies for Page Six at Le Cirque on Schwarzman’s birthday, which also happens to be Valentine’s Day.

DealBreaker was unable to determine if Schwarzman ordered the crab salad.

A Night Of Love [Page Six]

This morning the Telegraph reported that Blackstone was preparing an “audacious plan” to break up mining giant Rio Tinto. None of our usual sources has yet recovered from spending the weekend dressed as Santa Claus so we haven’t been able to reach anyone on it. But DealBook, which has shown that its got some very good Blackstone sources in the past, has just reported that the story is “rubbish.”

According to the Telegraph, Blackstone’s bid is in the advanced planning stages. It is reaching out to a Chinese sovereign wealth fund and other possible partners and has appointed lawyers, spoken with bankers and got public relations folks on ready.

But DealBook calls bullshit on the entire story. We’d like to know what you think.

Blackstone plans audacious bid for Rio Tinto [Telegraph]
Bad Rumor: Blackstone’s ‘Bid’ for Rio Tinto [New York Times]

Another private equity deal that has a lot of people paying attention is moving ahead. Blackstone’s $26 billion takeover of Hilton Hotels has been closely watched as another indicator of the strength of the buyout market and the willingness of banks and investors to finance the deals. Yesterday Hilton announced that it was kicking off a $1.8 billion tender offer for its existing notes, which will be paid off with new debt financing the acquisition.

The Hilton deal was the last major buyout announced before the private equity LBO market went into its currently catatonic state. Blackstone agreed to a hefty premium for Hilton—the price tag was a 40% mark-up from where the stock was trading before the deal was announced. The total price tag was around $26 billion—$20 billion cash and $6 billion of assumed debt.

In the current market, the deal is considered far riskier than at the time it was signed-up. The risk of a recession poses a real threat to hotel chains, and investors have been balking at the high levels of leverage involved in many of the largest takeovers. Blackstone plans to raise as much as $21 billion to finance the deal. Bear Stearns, Bank of America, Deutsche Bank, Morgan Stanley and Goldman Sachs all committed to finance the deal when it was closed.

The tender offer is just a first step—a small one—but it will likely be welcomed by thsoe who are concerned that all or part of the nearly $400 billion of buyouts waiting to close later this year might be held up by conditions in the credit market.

Press Release [BusinessWire.com]

Blackstone plunged over 3% and hit $21.30 this morning, pushing well into new low territory since its IPO. Without fearing even the most expensive crabs, Blackstone played “just the tip” with the $21-$22 range earlier in the week and subsequently decided to plunge deep into new, lower territory.

It’s only a matter of time before Blackstone attempts to muster up some good will by claiming that its share price is tumbling for the sake of greater national interests. China has lost over $800 million on its $3 billion investment into the Blackstone IPO so far.

In other misguided IPO news, Fortress is healthily above its 52-week low of $16.05, but heading back in the direction of new depths, down over a percent today at $17.31. Fortress’ 52-week high ($37.00) was almost double its IPO price of $18.50.

How Low Can Blackstone Go? [DealBook]

Blackstone big Steve Schwarzman may have gone into hiding but he’s still the talk of the town. Especially if your plot of land in that town—Greenwich, East Hampton, etc—was bought with private equity tax-advantaged dollars.

“Whenever group of private-equity guys gets together nowadays, the conversation inevitably turns to Steve Schwarzman,” the Economist reports today.

“It was all going so well until Schwarzman went over the top,” one will say. “Yeah, why did he have to hire Rod Stewart to sing at his birthday party?” replies another. “And then make quite so much money in the Blackstone IPO? Now everyone hates us, no one wants to lend to us any more, and Congress wants to tax us to hell and back.”

The forces of envy and political rent-extraction had been aiming at private equity for quite some time but there is little doubt that Schwarzman and the Blackstone IPO provided them with a much easier target. It’s always harder to attack abstractions than actual people. One of the Okies of The Grapes of Wrath once asked, “Who can we shoot?” Schwarzman accidentally volunteered his head—or, well, claws—for the rifle scope.

But it’s not just the politicians, labor unions and tax-eaters who have Schwarzman in their scopes. Another special interest group is looking askance at Schwarzman—his own industry. According to the Economist, a popular question among private equity hochos is “Well, what’s Schwarzman going to do to clean up this mess?”

The suggestion of the Economist editors is philanthropy. That’s a popular decision among the super-wealthy but we’re not sure it’s the right one. For starters, we can’t remember a single malefactor of great wealth whose reputation was rescued within his lifetime by charitable donations. Most of those who have made huge donations recently—say, Warren Buffett or Bill Gates—were already hugely popular. Schwarzman is no Buffett.

What’s more, there’s little evidence that huge donations to institutional charities are effective at accomplishing the presumed goals of the charities. Schwarzman may simply be throwing good money after bad if he pumps up the coffers of our giant charity industry. So what’s a down-on-his-luck private equity king, who brags about his own skill as a counter-puncher, to do to rescue his rep?

Saving Steve Schwarzman [Economist.com]

People used to say that the Blackstone Group was an investment bank pretending to be a private equity shop. Now they might start to wonder whether Blackstone is really a REIT. A REIT with an infinite credit line.

The world got a look for the first time at the quarterly earnings for Blackstone today. The firm said that net income more than tripled, with most of the gain coming from its real estate businesses. And much of that came from sales of properties it had acquired when it bought Equity Office Properties.

Net income rose to $774.4 million from $224.1 million for the same period last year. Revenue jumped to $975.3 million from $324.6 million, a 300% gain. But this number was short of analyst expectations, which had pegged revenues to come in at $991.54 million. But earnings per share after excluding various non-cash charges were 46 cents, which beat the expectation of 40 cents.

We’re terribly bored by the game of beating, hitting and missing expectations. The questions some are now raising is whether Blackstone can repeat this kind of killer performance. There are only so many EOP properties it can sell, and only so many EOPs it can buy to flip out there. And some think that tighter credit conditions might make it harder for Blackstone to see the kind of returns it has in recent years.

But it could have the opposite effect. As the M&A frenzy slows down due to tighter credit conditions and banks being less willing to help smaller firms with steroidal deal-boosters such as bridge equity contributions, Blackstone may find less competition in the buyout market and may concentrate on turning around and selling assets it has already picked up. At least in the short term, Blackstone probably has a mighty revenue stream it can rely on. And long-term, it may be able to find buying opportunities now that smaller players in the PE world are getting squeezed. Medium term? That’s what accounting is for!

“Small funds that were bootstrapping themselves with bridge equity are gone,” Blackstone’s Tony James said today. “The banks are making new loans but they’re being more selective and they’re leaning towards their biggest and best customers.”

In translation: we can still borrow because we pay those guys so much in fees they can’t afford for us to stop making deals.

On the conference call to discuss earnings today, one name was notably absent: Blackstone co-founder Steve Schwarzman. So where was the man who put the black in Blackstone? Deal Journal’s Dana Cimilluca asks and answers the question.

“The Blackstone Group chief sat out the private-equity firm’s first conference call as a publicly traded company today (a day when it reported net income of $774 million for the second quarter, compared with $224 million a year earlier). Schwarzman, who is traveling in China, continues a self-imposed quiet period that followed the company’s initial public offering nearly two months ago,” Cimilluca writes.

So maybe this is Blackstone’s long term plan. If times get tight, they’ll just act like the US Treasury and rely on China for cash.

Blackstone warns of buy-out slowdown [Financial Times]
Where’s Steve Now? [Wall Street Journal]

The Simpsons made $72 million in its opening weekend (our favorite comic book guy scene - facing impending doom, the comic book guy muses (paraphrasing here) “I’ve done nothing in my life buy collect comic books. Life well spent!”), picking up some Hollywood slack this summer by being one of the few films to exceed expectations.

Comic book guy, meet Steve Schwarzman, proud owner of the worst IPO ever, of 2007. In contrast to the ten largest U.S. IPOs this year, averaging a 14% return in their first month, Blackstone shares have dropped 21% in July, losing $7 billion in market value. Keep in mind that we’re talking about IPOs that are larger than $500 million and that Schwarzman still made out like a bandit and got to cockblock Kravis by lowering the PE IPO bar to virtually un-limbo-able depths.

Another Superlative for Schwarzman: Worst IPO [Deal Journal]

Blackstone Group traded up yesterday despite the near-universal melt-down on Wall Street, surging from $23.80 to $25.70 in the final ten minutes. After dropping almost nine percent in the afternoon, BX rallied with a flood of buy-orders, including a block of 114,000 shares at 3:59:55pm.

Was this the work of Morgan Stanley or Citigroup, pulling their big IPO up by the bootstraps; Steven Schwazman, trying to save face with his new cash; or some Blackstone insider, trading on advanced news that Blackstone is taking itself private?

A dark horse (im)possible reason for the signs of life in Blackstone: maybe they’re a takeover target. Market Watch columnist David Weidner suggested yesterday that Kohlberg Kravis Roberts & Co should abandon its plans for an IPO and stick to what it knows best: the buyout business. More concretely, Weidner suggest they should buy Blackstone.

Blackstone is inefficient. It will pay nearly $400 million of Schwarzman and other managers’ taxes during the next decade. Its IPO has generated a political backlash that could end up doubling its tax rate, and the firm expects “significant losses” during the next few years as it absorbs compensation costs and amortizes its goodwill, according the firm’s prospectus.

KKR could eliminate most of those ills by sweeping management out the door and installing its own team.

It’s simply spoiling the fun to point out that the governance structure built into the Blackstone Group would make any hostile takeover impossible. The rights of Blackstone’s common shareholders approach zero. In fact, the only recent deal we can think with less rights was the sale of a stake in Blackstone to a Chinese government entity, where the Chinamen arguably have less than zero shareholder rights.

In any case, Blackstone, the worst $500mn+ IPO of the year is down close to 7% today and 23% since the IPO. It is currently trading in a territory we call “Early Vonage.” China’s State Investment Company may be regretting its major stake in the private equity firm. Even after the 10% discount they received, the Chinese are down 13% in 5 weeks. As Reuters asked today, “Do friends lose friends that much money that quickly?”

The Case of the Mysterious Blackstone Jump [Dealbook]
Blackstone’s great leap forward [Reuters]
Barbarians face to face [Market Watch via Blogging Buyouts]

After the monumental IPO last month, Blackstone Group may already be an appealing target for private equity, Slate columnist Daniel Gross suggests.

What makes a good target? Slumping stock, healthy margins, lots of cash, valuable brand name, manageable debt, liability in public ownership. Check, check, check, check, check, check.

There’s a final bonus to Blackstone taking Blackstone private. Buyout firms pay substantial fees to the investment bankers who steer them toward targets, and help structure, and negotiate deals. Blackstone, of course, has a well-regarded financial advisory unit. So, Blackstone’s partners could essentially pay themselves for advising themselves to take Blackstone private.

Before the IPO, Institutional Investor predicted a Blackstone reprivatization in 2012, but with stock down 25% since June, this may be a conservative estimate. BX is trading down 1.75% today at $25.91.

Blackstone, Meet Blackstone [Slate]

The Blackstone Group’s $26 billion bid for Hilton Hotels has certainly ignited speculation about whether another big hotel chain—perhaps Hilton rival Marriot or Starwood—might also get taken out by private equity or whether some group might try to roll-up smaller companies to take advantage of economies of scale and branding.

Supposedly, everyone’s all excited about the hotel business now! Private equity’s here! Chuck Prince is still willing to lend money to keep the music playing! Let’s get this party started! Hot!

All too often the smaller, human-scale stories of the deals get left in the dust while everyone keeps talking about earnings multiples and leverage-to-ebitda ratios. And the story we want to tell is a story of the friendship of two very special young women. A friendship that was torn apart but now, it seems, has been repaired by the healing forces of private equity.

We’re talking, of course, about Lindsay Lohan and Paris Hilton. According to the website Gossip Girls, the “longtime rivalry” between the two favorites of the gossip pages “is over.” It seems that the stint in jail has Hilton rethinking her feuds. But, perhaps more importantly, Hilton has apparently been in good spirits since news of the Blackstone bid broke. A friend of Hilton’s tells the girls that “she’s got to be in a good mood after the Blackstone Group bought the Hilton Hotels, boosting her inheritance.”

Apparently the renewed friendship became public when Hilton attended a birthday party for Lohan on July 3. Somewhere out in St. Tropez, Blackstone chief Steve Schwarzman can breathe the sea air and relax with the ease of a man who knows he has restored a friendship that had long been torn asunder.

Paris Hilton’s Frienaissance With Lindsay Lohan [The Gossip Girls]

After opening with a poplet after its initial public offering on Friday, Blackstone’s stock has been trending downward toward the IPO price. On Friday, we asked DealBreaker readers to guess the price of the shares at close. (A move, we happily confess, was a blatant rip-off of a Market Beat item.)

Reader BB called it with his two PM forecast of a $35.01 close for BX. This was just a nickel short of the actual close of $35.06, making BB the winner according to our Price Is Right rules. We’ll be sending him a copies of Jack and Suzy Welch’s Winning: the Answers and Dana Vachon’s Mergers & Acquisitions. BB requested that we maintain his anonymity.

“I arrived at the $35.01 closing price by a combination of technical analysis and luck,” BB told us. “I noticed that after the initial pop in BX shares the stock sold off rather quickly, dropping from $38 and finally catching a bid around $35. It rallied back to $36, but I suspected another wave of selling before the close and guessed that the stock might hold that $35 level once again. Remembering the old Price is Right strategy, I tacked on a penny to my guess – and bingo: $35.01.”

Click here for a pop-up version of the chart BB used for his winning analysis. Arrow indicates the time the closing price forecast was submitted.

On the eve of the company he co-founded with Stephen Schwarzman going public in the sixth largest IPO in US history, Pete Peterson threw a party for his daughter Holly at the Four Seasons. The party, ostensibly to celebrate the publication of Holly’s debut novel The Manny, attracted a host of notable guests from the world of finance and media. It was a lavish affair in the grill room of the Four Seasons, defying expectations that Blackstone’s founders would be shying away from public exhibitions of their wealth after recent attention on Schwarzman’s wealth seemed to provoke a public backlash.

Our invitation must have been sent to the wrong address because we’re pretty sure Pete and Holly wouldn’t have neglected to invite DealBreaker. After all, they had invited riff-raff from New York magazine and “Page Six.” So we crashed the party. And promptly got tossed out into a raging storm.

We’ll forgive the Petersons because they have far more money than we do. Besides, being outside gave us the chance to pall around with CNBC’s Bertha Coombs and her team, and snap some pictures of the arriving guests. And eventually Holly stopped by to speak with us. She mentioned that she was proud of her father and that she thought that video for the Manny was “very funny.” But we wanted to know the answer to the most important question: was the publication of her book and the scheduling of this party the reason the Blackstone IPO was moved up an entire week.

“That’s just a coincidence,” Holly said.

A long time after all the important guests arrived, the party crash team from Gawker showed up, dressed in costumes that were part Eastern European goth and part Williamsburg drunktard. They tried to sneak into the party. No dice. Security and the PR girls blocked them like a third-rate Jersey City hedge fund trying to buy into the BX IPO. Instead, they hung around in the rain with us, chatting up the wealthiest cougars they could find.

[After the jump we bring you a slide show of Scott Bressler’s photos from the Peterson party.]

More coverage of the events from around the internet:

Crashing The ‘Manny’ Book Party [Gawker]
Liz Smith Gets Grabby at ‘Manny’ Celebration [New York Magazine]

We’re almost halfway through the first trading day for shares of Blackstone Group, which opened this morning at $36.45. The stock seems to be holding at that level, hovering just above and below the opening price on volume that is fast approaching 100 million shares traded.

But some are already starting to grumble that Blackstone’s opening day performance has been a bit, well, lackluster. Peter Cohan at Blogging Stocks contrasts the performance of Blackstone shares with those Fortress Investment Group, which rocketed upward on the first day they traded.

“Fortress’s stock rose 68% on its first day of trading in February 2007. This first-day pop may have inspired Blackstone to move forward with an IPO but Blackstone’s offering seems to have been greeted with a relative yawn,” Cohan writes.

Blackstone had the decided disadvantage of opening on a day when the overall market moved downward and traders were distracted by a rejiggering of the S&P 500. The Dow Jones Industrial Average is down over 100 points as we go to press. But Cohan thinks there is more going on here, including tax issues that threaten to hurt the bottom line of the company and rising interest rates that may make its deals more expensive.

“I think investors realize that not only does this offering suggest specific problems with Blackstone’s offering but it sends a signal about the outlook for private equity,” he writes.

Not everyone agrees that Blackstone’s performance indicate any problems.

“It’s clear that Fortress got jacked by their underwriters. A lot of institutional investors made a fortune on that opening. Schwarzman seems to have cut a better deal for Blackstone here, pricing the deal far closer to the market price while still giving those in the IPO a good shot at upside,” an investment banker told DealBreaker.

The Wall Street Journal’s Market Beat blog asks its readers what will happen to the shares today. Guesses are all over the place, going as high as a $90 close. So we’re turning to a higher authority—the DealBreaker readership. In the comments section below leave your best guesses at where BX will close. Closest guess without going over gets a copy of Dana Vachon’s Mergers & Acquisitions and a copy of Jack and Suzy Welch’s Winning: The Answers.

Blah, blah Blackstone, have you any bulls? [BlogginStocks.com]
Blackstone’s Bonanza [Market Beat]

Shares of the Blackstone Group began trading on the New York Stock Exchange this morning under the ticker symbol BX at $36.45, an 18% premium from the initial public offering price. The opening was slightly behind schedule as the specialists handling the stock sorted out some pretty wild bid margins. One buyer asked for a hundred shares at a price of $1000 a share, according to CNBC.

The IPO raised $4.13 billion dollars last night, making it the sixth largest in US history and the largest in the last five years. (AT&T, Kraft, UPS, CIT Group and Conoco were all larger)—until you adjust for inflation and the relative size of capital markets. The IPO was massively oversubscribed and we’re told that many of the institutional investors came away with far fewer shares than they would have liked as the underwriters stretched the offering to let in as many of the big institutions and funds as possible. Admission to the IPO was more or less the hottest ticket in town last night (arguably hotter, even, than the party at Four Seasons thrown for debut novelist Holly Peterson, the daughter of Blackstone co-founder Pete Peterson).

A trader familiar with the plans of a few prominent institutional investors we spoke with said they wouldn’t be attempting to snap up more shares at the opening this morning, preferring to give the stock “room to breathe” after the IPO. He added that many investors were pleased that Blackstone didn’t try to push the IPO price higher despite the strong demand, a move which more or less guaranteed the stock would open significantly higher than the price they paid.

The Blackstone IPO has been one of the most closely watched—and fiercely challenged—events in recent Wall Street history. Novelist Tom Wolfe even showed up on the exchange floor to watch the action this morning, remarking that he came to witness “the end of capitalism as we know it.” Recent weeks have seen challenges from lawmakers who sought to block the IPO, threats of legislation that would raise taxes paid by private equity firms, concerns over Blackstone head Steve Schwarzman’s very publicly lavish lifestyle, and last minute changes in the unusual way the company accounts for its earnings.

But none of this seems to have dampened interest in owning the shares of Blackstone.

Schwarzman shrugged off the tradition of ringing the opening bell to mark the new listing. Some have said this was a move to lower his profile. (There’s been widespread criticism from others in private equity that Schwarzman has too heavily courted publicity, perhaps inviting political blacklash). Others have said that Schwarzman’s absence was intended to project insouciance and confidence about the stock offering.

The countdown to the opening of Blackstone under the ticker symbol BX has begun. The opening volume is expected to exceed 16 million shares, and all sorts of crazy opening numbers are being thrown around. After the jump, we poll the ultimate authority: DealBreaker readers.

Breaking: The Blackstone IPO priced at $31.

$$$ Both the LA Times and our own Joe Weisenthal ring the alarm bells about the valuation of the Blackstone Group. No one is listening.

$$$ Running the numbers on the Blackstone IPO

$$$ Congressmen Henry A. Waxman and Dennis Kucinich ask the SEC to stop the IPO. (Hint: That’s not going to happen.)

$$$ The boys at Deal Journal point out that Blackstone is paying half-price for the underwriting of its IPO.

$$$ Andy Kessler says the Blackstone IPO is a sign of the top of this market for leveraged buyouts.

$$$ The other shoe is falling: Congress may raise the taxes on “carried interest.”

So what if the initial public offering is pricing tonight? Who can even worry about a bunch of Senators who think it’s not fair that Steve Schwarzman’s tax rate is lower than the guy who makes his $400 crab salads? Tonight’s real Blackstone action is happening at the book party for Holly Petersen, the socialite daughter of Blackstone co-founder Pete Peterson, at Four Seasons. Peterson has written a book called The Manny, a roman a clef novel about wealth, sex and wealthy sex. (You know how it goes: less often but with less clothes on.)

To promote the novel the publisher has also put together the music video above, set in the sumptuous apartment of Blackstone’s Peterson at River House on East 52nd Street. The video opens with an investment banking type ignoring his wife’s plea for attention while he taps away at his Blackberry. Enter the Manny, the white knight who comes to fulfill the unmet needs of an upper east side woman wife with a driver from Jamaica, a tailor from Hong Kong, a super from Costa Rica, a maid named Wong, and two illegal alien nannies. It’s a hard-knock life in the one-double-oh-two-one.

Oh, and Holly? What else do you need to know about her? The heiress daughter is described as having “upper east side connections and a downtown sensibility”—which, we’re told, is exactly what the bouncers at the Box are told to look for when deciding who gets in. (None of those LES riffraff, please. Shouldn’t those people all be in Williamsburg by now?) And, of course, she cleared over a million from the publisher who signed her for the deal.

When it rains, it pours, as they say. And when you are the daughter of the founder of Blackstone, apparently it pours money.

We are all quivering with excitement over the Blackstone IPO this week, but some, like Breakingviews.com editor Edward Chancellor, are looking further into the future. Because many of us at Dealbreaker hold or are pursuing advanced degrees in comparative literature with a financial sector specialization, we were fascinated by Chancellor’s piece in the June Institutional Investor: a fictional and dead-serious letter from Stephen Schwarzman to Blackstone shareholders, dated June 1, 2012, regarding the proposed buyback and delisting of Blackstone shares.

According to the letter, after Blackstone goes public this week, it will face five perilous years marked by “deteriorating economic conditions, extraordinary convulsions in the credit markets, a worsening political and legal environment for the buyout industry, and the consequences of what is not commonly referred to as the ‘private equity bubble.’” It will all culminate with a buyback at $15-per-share (a “substantial premium to current price”), about half of the anticipated IPO price.

As a document of 2007, the letter is more didactic than damning, saying of the “Private Equity Bubble,”

The entire buyout industry, including Blackstone, must accept its share of responsibility for our current woes. At the time of our IPO, returns from buyouts had been excellent, largely because both corporate valuations and profits had been rising in tandem for several years.

In hindsight, it’s clear that we became over confident. Too much private equity money was chasing too few opportunities. We found it difficult to resist the urge to raise ever-larger funds. And we put that money to work to quickly. In the takeover frenzy, many private equity firms were over stretched. There was a collective loss of investment discipline. Too many businesses were bought at large premiums when profits were near a cyclical peak. Given the fees on offer and the ease with which assets could be flipped only months after acquiring them, out actions were understandable.

Imagining a not-too-distant world in which Blackstone forsakes its listing [Institutional Investor]