Friday Letter Let's get this party started

The rising public profile of private equity was brought into stark relief earlier this week when Steve Schwarzman, the co-founder of The Blackstone Group, hosted his 60th birthday party in New York City. Sure, LBO moguls have always thrown lavish parties for themselves—Schwarzman’s bash reportedly cost $3 million—but rarely have they received so much press in the international media.

When the gossip column of The New York Post covers such an event—noting, as it did, that the party hall was decorated to look like Schwarzman’s palatial living room—that is one thing. But when both The Hindustan Times and The New Zealand Herald write about the evening’s entertainment—the singer Rod Stewart, at a cost of $1 million—then you know that private equity has reached a new level of global saturation.

Along with global domination, of course, comes media scrutiny. Several publications, including The Wall Street Journal, criticized Schwarzman’s party not necessarily for its conspicuous consumption, but for its potentially chilling effect on the private equity industry. Public shareholders and labor unions, the argument goes, are becoming increasingly unhappy with the growing influence of private equity in the public sphere and the more ostentatious the behavior of private equity barons become, the more difficult their next takeover will be. Shareholders won’t agree to sell so easily, critics note, if they see how much easy money Schwarzman and his cohorts can wring out of their companies.

While there may be some validity to those arguments, public shareholders are likely less concerned with the wallets of private equity firms and more concerned with their own. If shareholder resistance to private equity takeovers increases—and it certainly has in recent months—it will be due to the knowledge that LBO firms either have been willing to increase their bid, as in the case of Harrah’s, or have been able to flip their properties quickly, as in the case of Hertz, implying that shareholders left something on the table.

Overlooked in all of this criticism, of course, is how much work it actually takes to make those profits in the first place. While Schwarzman and his friends were listening to Stewart belt out “Forever Young,” a cadre of Blackstone pros was busy burning the midnight oil. As reports in The New York Times and Bloomberg have noted, not only did Jon Gray, the head of Blackstone’s real estate group, miss attending the Super Bowl to work on the EOP deal, he has also eschewed the traditional post-acquisition party—instead, Gray and his wife celebrated with a quick glass of champagne at Blackstone’s Park Avenue offices.

The dichotomy between Schwarzman’s $3 million party and Gray’s muted celebration are due to a number of factors—the different temperaments of the two men, the natural dichotomy between a company’s founder and his employees, the fact that Gray has been extraordinarily busy selling off EOP’s assets—but the overriding reason is much simpler.

Schwarzman can spend his own money however he wants. But when it comes to Equity Office, he is not spending his own money; he is spending his investors’. And that requires a lot more discipline, patience and frugality.

If the EOP deal turns out to be the RJR Nabisco of the new millenium, then the press will write that Schwarzman’s fete represented the zenith of the current private equity party. If all goes well, of course, there will be plenty of time in the future for a whole new party, for Gray, Schwarzman and Blackstone’s investors. And you can bet it will be a big one.