Steve Schwarzman

Bond investors bet on the ghost of Blackstone CEO future

April 4, 2014: 8:53 AM ET

The asset management firm is still run by its original founder, but that didn't stop investors from betting on its succession plans.

By Lauren Silva Laughlin

Blackstone CEO Steve Schwarzman

Blackstone CEO Steve Schwarzman

FORTUNE -- Investors are confident that whoever will be running Blackstone in 2044 will be doing so capably. If that person takes the helm at the giant alternative asset manager at the same age founder Steve Schwarzman started the firm in 1985, he or she is currently rounding out second grade.

Indeed, public investors in the 30-year bond market must have strong confidence in the firm's succession plans. They lapped up a $500 million offering from Blackstone earlier this week at a 5% yield.

It is a deal that speaks volumes about the private equity business -- and the bond market as well.

Private equity deals had once been the bread and butter of firms like Blackstone (BX). After Schwarzman took the firm public in 2007 (in a noisy public offering that made him and some colleagues instant billionaires), Blackstone used its public currency to grow quickly. Its real estate business now trumps its buyout group, as does its alternative asset management group, and a very large and growing credit business thanks, in part to the acquisition of hedge fund GSO, which Blackstone bought using its stock in 2008. Blackstone also has a top advisory practice that is chugging along. It is even making headway in being one of the first to successfully offer alternative investments for retail investors through Fidelity.

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Many investors now view Blackstone on a par with financial institutions like Goldman Sachs (GS) (for reference, its market cap is about half that of Goldman's). The bond deal underscores this idea. Typically long-term bond offerings are reserved for firms that have been around and tested for many years. Large financial institutions and banks have always been big 30-year borrowers.

Banks' ability to tap this market was hurt a bit following the financial crisis. But they and others have bounced back in full force, thanks in part to the threat of rising rates (creating a rush of issuers), and investors' desire to scoop up just about any extra promise of yield (creating high demand of borrowers).

As measured by the Barclays U.S. Corporate Investment Grade index, deals dated longer than 10 years accounted for 26% of the total $3.47 trillion comprised in the index as of Dec. 31, or roughly $916 billion. That was up from 22% 10 years earlier. Last week Bank of America (BAC) issued the third-largest bond deal of the year, which included $1.5 billion of 30-year bonds.

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Blackstone is relatively new to debt markets generally. It tapped the bond market in 2009 for the first time ever. It's quite an accomplishment to go from zero to 30 in just a few short years. (Blackstone had another 30-year bond offering in 2012, but half the size and at a higher rate.)

Though Blackstone's business is well beyond infancy stages, investors would be served well to remember that, in terms of its front office, Blackstone potentially has plenty of growing pains ahead. Schwarzman still sits atop of the firm. Tony James, the firm's other leading face, is well into his sixties. The firm has younger blood, like real estate head Jon Gray who is in his early forties. But unlike Goldman Sachs or Bank of America, Blackstone hasn't made it through one full round of successions, let alone several. And 30 years is quite a long time.

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