Insiders strike gold. Will investors too?

EVERY good writer of television drama knows the value of keeping the audience hungry for further instalments. So, it would seem, do the men who run Blackstone, a private-equity group that is about to sell a chunk of itself to the public. In the run-up to its eagerly awaited share offering, information about the inner workings of the secretive outfit has been released in tempting dribs and drabs. This might have been unbearable, were it not for a few cathartic coups de théâtre: first the sale of a stake of almost 10% to the Chinese government, and now the disclosure of the vast spoils accruing to Blackstone's leaders.

The mightiest of them, co-founder Steve Schwarzman (pictured), is due to sell stock worth up to $677m, leaving him with a 24% stake valued at almost $8 billion. When Blackstone's shares start trading, perhaps later this month, he will officially overtake Rupert Murdoch and Steve Jobs on rich lists. According to this week's filing, Mr Schwarzman earned $398m last year, almost double the combined pay of the bosses of Wall Street's five largest investment banks. Obscene, some cry. But almost every penny came from gains in investments, rather than salary or bonus. If only all executive pay was so closely tied to performance.

A more reasonable concern is that the hordes clamouring to invest in the offering get caught up in a shocking denouement, as credit tightens and prices of shares fall after they are issued. Signs that the market may be past its prime include rising bond yields and reports of some buy-out shops having to haggle with previously pliant lenders. “Everyone knows this is a cyclical industry,” says Colin Blaydon of the Tuck School of Business's Centre for Private Equity. “Before long, the perfect storm of value creation we've seen over the past couple of years is sure to die down.”

But when it does, it may not be the private-equity houses that feel the most pain. Some of the companies that they own are pretty much default-proof, thanks to the loosening of debt covenants by deal-hungry banks competing to provide loans. It is the ultimate holders of this debt—largely, but not exclusively, hedge funds—which will be hit hardest. Any investment banks with bridge loans or bridge equity on their books that they have failed to syndicate may also suffer.

Moreover, for today's private-equity giants traditional buy-outs are just one of several lines of business. They all have big and burgeoning restructuring arms, which could soon be jostling for distressed assets. Some of their best investments were made in the recession years of 1981, 1991 and 2001, Mr Blaydon points out. Clouds may form over Blackstone's new shareholders, but they should have a silver lining.
Jun 14th 2007 | NEW YORK From The Economist