Hello, welcome to Investor’s Bookshelf. In this episode, we are reviewing the book King of Capital, which tells the fascinating growth story of Blackstone, the world’s private equity giant. The book reveals the secrets of this seemingly mysterious industry and provides us with a deeper understanding of Wall Street’s financial history.
Let’s first introduce Blackstone. Blackstone is the world’s leading private equity investment firm. I will explain the private equity industry in detail later. We all know Wall Street is full of investment banks with centuries of history. However, since its founding in 1985, Blackstone has been around for only three decades. Yet in this short span, the company has survived multiple recessions and crises, continued to grow, and eventually became the king of the private equity industry. That’s why it earned the nickname—and the title of this book—King of Capital.
It is considered the king for two reasons. First, scale: Blackstone started with only $400,000 in capital, but today its market value exceeds $20 billion, and it manages more than $400 billion in assets, ranking among the global leaders. Second, influence: Blackstone’s management style has had a profound impact on the entire industry. Over the past three decades, Blackstone also created many legendary deals, such as the iconic Hilton acquisition, which alone brought the firm $14 billion in profit—one of the most profitable transactions in private equity history.
One could say that to understand Blackstone is to understand private equity. The industry is often abbreviated as “PE,” a term financial professionals frequently use. It sounds mysterious, but the business model is not complicated. In short, private equity firms do three things: first, find targets—acquire companies whose prices are deeply undervalued or have great growth potential; second, raise capital—designing financial structures and using leverage to gather acquisition funds; third, buy low and sell high—after acquisition, enhance company value, and then exit at the right time and method for profit. Blackstone became the global leader precisely because it excelled at all three. Its founders, partners, and investors earned enormous rewards, while its influence on the world economy grew steadily.
It is worth mentioning that Blackstone has deep ties with China. As early as 2007, China Investment Corporation, the sovereign wealth fund, invested in Blackstone and held shares for 11 years until exiting in 2018. Stephen A. Schwarzman, one of Blackstone’s founders, also donated to Tsinghua University to establish the Schwarzman Scholars program, aimed at cultivating future world leaders. “Schwarzman” and “ Su Shimin” are in fact the same person, just different translations. In this review, we will consistently use the name Schwarzman.
The authors of this book, David Carey and John E. Morris, are veteran journalists at America’s top financial magazines, with years of experience reporting on private equity. Their vivid storytelling helps readers gain insight from Blackstone’s ups and downs and better understand the PE industry.
Next, let’s focus on three key points. First, how did Blackstone seize Wall Street’s big trends, leverage its strengths, and rise so quickly? Second, what were its unique strategies to grow into Wall Street’s “King of Capital”? Third, what role do private equity firms like Blackstone play in the economy—are they greedy demons, or angels that rescue companies in distress?
Part One
Let’s begin with the story of Blackstone’s early entrepreneurial phase.
The founders of Blackstone, Peter Peterson and Stephen A. Schwarzman, both worked at Lehman Brothers, a famous Wall Street investment bank. In the early 1980s, Lehman Brothers, due to recession and trading mistakes, was on the verge of collapse. Although the company eventually escaped danger, it soon fell into a vortex of internal conflict. This left Peterson and Schwarzman weary, and they decided to leave Lehman to strike out on their own. Thus, in 1985, with $400,000 in starting capital, they founded Blackstone.
Large investment banks usually build very long product lines, but Blackstone didn’t want to do this. They wanted to focus on one thing—private equity investment. As mentioned earlier, this industry raises client capital, acquires stakes in target companies, and then sells them for profit. Because the core activity is mergers and acquisitions (M&A), this business is also called leveraged buyouts. Why did Peterson and Schwarzman choose this business when starting out? On the one hand, both were deeply interested in it, having long experience in investment banking and familiarity with M&A. More importantly, at that time, leveraged buyouts had already become one of the fastest-growing and most eye-catching businesses on Wall Street. One could say that Blackstone’s founding rode the wave of a major Wall Street trend.
This trend was not accidental. Before the 1960s, diversification was popular—large conglomerates scrambled to expand into different industries. But in the 1970s, many realized diversification didn’t work, and began divesting non-core assets, creating numerous targets for buyouts. At the same time, investment bank Drexel Burnham Lambert invented the financial instrument known as the “junk bond.” The issuance of junk bonds provided buyouts with essential funding—Drexel alone issued $80 billion in junk bonds in the 1980s. As a result, leveraged buyouts entered a phase of explosive growth. Peterson and Schwarzman’s choice of this direction reflected sharp insight and sound judgment.
Of course, choosing the right direction didn’t mean smooth sailing. With only $400,000 in starting capital, getting a small firm off the ground was no easy task.
As noted earlier, doing well in leveraged buyouts requires three things: finding targets, raising money, and buying low while selling high. The first two are particularly critical. “Finding targets” means carefully selecting companies whose value is either undervalued or with great appreciation potential—buying at a low price today, then selling later at a higher one. “Raising money” is easier to understand: buyout firms don’t use their own funds; they must attract investors, usually by forming funds. And in actual deals, beyond investment capital, they often use financial leverage—borrowing from banks and other sources—to maximize available funds for acquisitions.
So, at the beginning, Blackstone could only provide M&A advisory services to clients. Its first deal earned just $50,000 in fees. But the two founders were not discouraged. They set a bold goal for Blackstone: to raise a $1 billion investment fund. In terms of finding projects and raising capital, Peterson and Schwarzman each played to their strengths.
Peterson, the elder, had served as U.S. Secretary of Commerce under President Nixon and later became CEO of Lehman Brothers, where he was Schwarzman’s boss. Shrewd and well-connected, Peterson had an extensive political and business network. Schwarzman, younger and energetic, excelled in sourcing targets, assessing value, timing exits, and also had sharp management instincts. The two complemented each other perfectly: Peterson set strategic direction, raised funds, and used his connections to source deals; Schwarzman handled detailed screening, evaluation, and execution. This golden partnership gave Blackstone a very strong foundation from the start.
Still, the early stage was full of setbacks. Despite their powerful networks, Blackstone was a new firm with no track record. They tapped every connection and sent business proposals to hundreds of potential clients. After months of effort, all 18 institutions they had pinned hopes on rejected them. Finally, through Peterson’s personal ties, Prudential Insurance Company of America agreed to invest $100 million—but with harsh conditions.
Even so, for young Blackstone, this $100 million was a lifesaver. More importantly, Prudential, a powerful and prestigious investor, effectively endorsed Blackstone. Soon, one institution after another came knocking, including many Japanese firms. At the peak of Japan’s economic bubble, Japanese financial institutions were flush with cash and eager to invest in the U.S. market. By early 1987, Blackstone had raised $600 million.
What did this $600 million mean for Blackstone? First, by industry custom, the firm could charge a 1.5% annual management fee—$9 million per year. Second, for completed deals, Blackstone could also collect 20% of profits as carried interest. For a company less than two years old, this meant it could survive. More importantly, with $600 million in hand, Peterson and Schwarzman could finally pursue major buyouts.
Soon, they seized an excellent opportunity. In 1988, U.S. Steel decided to sell its struggling transportation business. Blackstone predicted the transport industry would soon rebound. It contributed over $10 million of its own and secured $600 million in bank financing to complete the acquisition. The industry did recover quickly. Within two years, Blackstone had quadrupled its investment. By 2003, when it fully exited, Blackstone and its investors had earned an astonishing 25 times return, with an annualized return of 130%. This deal became one of Blackstone’s early landmark successes and a powerful calling card to attract clients.
That was the story of how Blackstone got started and gained traction. Buyouts are a high-reward business, but high reward also means high risk—especially during recessions or crises, when such firms are very fragile. On one hand, raising capital becomes extremely difficult; on the other, companies or shares acquired earlier may run into trouble, collapse in value, and become impossible to sell—sometimes even going bankrupt. That’s why many older buyout firms failed to survive. Yet Blackstone not only weathered downturns and crises, but grew stronger each time, until it became the King of Capital. What enabled it to do so?
Part Two
Now let’s move to the second part: Blackstone’s secret formula for becoming Wall Street’s King of Capital.
According to the book, Blackstone’s unique formula can be summarized in at least three points worth noting: first, a cautious management style; second, an innovative branch partnership model; and third, a powerful ability to create value in acquisitions.
Let’s start with Blackstone’s cautious management style. M&A investing often requires bold decisions, sometimes with a gambling element—you must believe that the equity you purchase will significantly appreciate in the future. As the industry’s king, Blackstone certainly has the courage to act when necessary. However, compared with its more aggressive peers, its overall style is clearly more cautious.
Two examples illustrate this. The first is caution in resource allocation. Remember, when Blackstone was founded, it had only $400,000 in starting capital, just a few employees, and rented a very small office. Although the PE business mainly relies on raising client capital and does not require much of its own funds at the beginning, even by industry standards, $400,000 was frugal. Peterson and Schwarzman each put in half. Both were seasoned Wall Street veterans with deep personal wealth—they could have easily hired more staff or rented a larger office. But they chose not to. They believed their chosen direction should quickly prove self-sustaining without large upfront spending. If the $400,000 ran out without generating revenue, that meant the direction was flawed, and pouring in more money would only increase the risk. For a start-up, this was a very cautious and rational attitude.
The second example is caution in industry focus. Blackstone avoided chasing fads. It preferred sectors such as hotels, tourism, food, and chemicals—industries that seemed less glamorous. Blackstone believed hot new industries were either unproven and might fade quickly, or overheated by too many investors, which pushed equity prices too high and left little room for future gains. By keeping a distance from such sectors, Blackstone might miss out on surging booms, but it also avoided devastating busts.
Blackstone excelled in traditional industries, profiting from cyclical fluctuations. Even when approaching emerging industries, it tended to look for projects at the intersection of old and new. For example, during the late 1990s internet boom, Blackstone did not directly invest in internet companies but instead targeted cable television networks. Though traditional, cable networks were also critical for internet data transmission. The rise of the internet indirectly boosted this sector. Blackstone carefully selected five such projects, earning more than $10 billion in profit. When the dot-com bubble burst in 2000, Blackstone’s limited direct exposure spared it from major losses. This cautious attitude repeatedly helped the firm weather downturns and crises.
After caution, let’s look at management innovation. In private equity, Blackstone pioneered a new model: forming joint ventures with top employees to run specialized subsidiaries. Everyone knows finance relies on talent. In PE, dependence on top performers is even greater. To attract and retain them, firms tried everything. For true stars, salaries and bonuses were not enough to bind them to the firm. The common practice was to grant equity in the parent company, creating a partnership structure. But this diluted control and raised disputes over share allocation. Internal conflicts could easily erupt.
Remember, Peterson and Schwarzman had left Lehman partly because of endless internal strife. They didn’t want Blackstone to repeat that mistake. So, they designed a new joint-venture model. Instead of giving parent company equity, Blackstone set up a separate subsidiary in the star’s domain. The star and Blackstone co-owned the subsidiary, aligning their interests. For that business line, the star was also a boss—success meant higher payoffs.
This was different from typical partnership models in law or accounting. Those dilute equity of the parent firm, but Blackstone’s model did not. The founders retained firm control while still tying top performers’ fortunes to Blackstone. This approach immediately attracted elite talent on Wall Street. These joint ventures became pioneers expanding Blackstone’s reach in various sectors.
For instance, Larry Fink, a bond expert, co-founded BlackRock with Blackstone. “Black Rock” and “Black Stone” even sound like relatives. BlackRock later spun off and today is the world’s largest publicly listed asset manager, with over $6 trillion under management. Meanwhile, other specialist firms remained under Blackstone, continuing to expand its empire. This model also influenced other PE firms and even industries beyond finance.
Finally, let’s discuss Blackstone’s ability to enhance the value of acquired assets. For a PE firm to become the King of Capital, real skill is essential: earning tangible profits from deals. Success requires three abilities. First, raising capital—attracting investors, creating funds, and leveraging outside financing. Second, selecting promising targets and executing M&A deals. Third, timing and structuring exits effectively, whether through IPOs or sales.
Blackstone excelled in all three. But what set it apart was its capacity to increase the value of acquired companies—its core competitive edge.
How did it achieve this? One way was counter-cyclical investing—acquiring companies during industry downturns, then selling after recovery. Even without changes in the company itself, value rose with industry cycles. Blackstone’s profit came from its expertise in timing and anticipating these cycles.
But it also mastered higher-skill methods. After acquisitions, Blackstone actively cut costs, improved management, and expanded businesses. This way, by exit, gains included not just market cycles but also operational improvements. Few firms had the expertise to do this as well as Blackstone.
Take the case of Celanese, a German listed producer of chemical additives. In 2001, during a chemical industry downturn, Blackstone spotted its value and also saw room for managerial improvement. It began negotiations with management and shareholders while quickly raising funds. In April 2004, Blackstone completed the $3.4 billion acquisition—the largest PE takeover of a listed German company in history.
Afterward, Blackstone did not simply wait for industry recovery. It took active steps: reshaped management culture to be more flexible and less bureaucratic; cut costs by consolidating production in North America, improving productivity, selling unprofitable units, and shifting some operations to lower-cost countries; and expanded its scope by driving acquisitions that boosted global market share of key products. These measures quickly paid off—cash flow rose by over 40% within a year.
In 2005, Blackstone helped relist Celanese in the U.S. By 2007, when it exited, Blackstone had earned $2.9 billion in profit from the deal—the largest single gain in its history. While industry recovery and financial leverage played a role, the greater factor was the value created through operational improvements.
This shows how Blackstone survived crisis after crisis to become the King of Capital. Luck in timing played a part, but success was never just luck. Cautious management, its innovative joint-venture model, and powerful value-creation ability—these were Blackstone’s secret weapons, and lessons worth learning.
Part Three
Finally, let’s discuss one question: what role do private equity firms like Blackstone play in the economic system—are they angels or demons?
Many people, including academics and financial professionals, hold negative views of private equity. In their eyes, PE firms are ruthless and greedy. They strip acquired companies, fire executives and employees without mercy, and then sell the firms on the market as if they were livestock. All they care about is quick money and arbitrage, with no benefit to the company’s development or the broader economy.
This viewpoint has long been influential. A classic business book, Barbarians at the Gate, tells the story of Wall Street takeover titans fighting for Nabisco—the company that makes Oreo cookies. From the word “barbarians,” one can sense the author’s attitude toward such deals.
However, this book does not share that view. Its argument is that while PE firms sometimes make cold adjustments to business operations or staff, their ultimate goal is to increase the company’s market value so it can fetch a better price upon exit. The next buyer isn’t a fool—if they are willing to pay more, that means those earlier “cold” adjustments truly added value. One acquisition at a time, one company at a time, private equity contributes to overall economic development. By helping undervalued companies gain recognition, PE firms actually create value for the economy. As long as they operate within the law, there is no need for moral condemnation.
Moreover, firms like Blackstone have consistently adhered to “friendly takeovers.” A friendly takeover means communicating fully with shareholders and management beforehand, considering their interests; and after acquisition, avoiding harsh unilateral decisions on business or staff, while helping the company grow in value. The earlier case of Celanese is a good example—combining friendly takeover with value creation. In that deal, Celanese’s profitability rose sharply, Blackstone earned huge profits, and both the former shareholders and subsequent buyers benefited. It was a win-win for all parties and positive for the overall economy.
During the restructuring, some jobs were cut, but many new ones were added. Net job losses accounted for only about 4% of the workforce, while labor productivity rose nearly 50%. The company’s performance and market valuation climbed significantly, proving the value of the changes.
Historically, in the early days of private equity, hostile takeovers and rapid flips were more common, with entire management teams sometimes swept out. But from the start, Blackstone set a principle of avoiding hostile takeovers and instead pioneered a trend of friendly acquisitions. In this model, PE firms emphasize cooperation with original shareholders and management, preserve most of the existing team, and then apply financial and operational expertise to help the company improve and grow. They may even inject their own industry and financial resources into the business. The Celanese case demonstrated not only Blackstone’s skill in enhancing value but also its commitment to friendly deals.
Therefore, the book concludes, because firms like Blackstone favor friendly takeovers and have the ability to create growth for acquired companies, the PE industry is not a demon. For companies and the economy, it is valuable and contributive. Despite being hit by financial crises, both Blackstone and the PE industry still have vast room for long-term growth.
Conclusion
That brings us to the end of this book’s discussion. Let’s recap:
First, we explored Blackstone’s founding story. The firm rode Wall Street’s booming private equity trend but still faced many struggles in its early stage. After repeated failures in fundraising, it secured $100 million from Prudential, taking its first step forward. Then, by acquiring U.S. Steel’s transportation unit, Blackstone scored a spectacular 25-fold return—its breakthrough deal.
Next, we revealed the secrets behind Blackstone’s rise through crises to become the King of Capital. The book argues its success stemmed from three key factors: a cautious management style, an innovative joint-venture structure with top talent, and an exceptional ability to increase the value of acquired companies. These helped Blackstone stand tall and stand out in the risky, competitive world of private equity.
Finally, we discussed the role of PE in the economy. While there are hostile takeovers, quick flips, and ruthless layoffs in the industry, firms like Blackstone prove that private equity is not a demon. By focusing on friendly deals and helping companies grow, they play a positive and constructive role in both corporate and economic development.
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