Blackstone Is Celebrating the End of a Party

The Cosmopolitan is a poster child of sorts.

When Blackstone bought the struggling hotel firm in 2014, the investment giant never expected for revenue to plummet by 2020 in the heat of a pandemic. Since acquiring the Las Vegas resort in a $1.8 billion deal, Blackstone spent more than $500 million on upgrading the Las Vegas property. Every corner of the resort was embellished.

Then it agreed to sell the operations late last year for $5.65 billion, in one of its most profitable asset sales in the firm’s history. As the deal awaits its completion, Blackstone drew thousands of Cosmo employees to the resort this week to surprise them each with a $5,000 cash award -- everyone from the housekeepers to the bartenders to senior staffers.

Blackstone's total tab was almost $30 million. Strobe lights lit up the auditorium and confetti flew down from the ceiling. Some employees even cried.

More and more, private investment firms are finding ways to create incentives for the employees of companies they own. The conversation is all the more relevant, with firms considering going private as the stock market whipsaws and recession fears loom.

While the one-time Blackstone award helped reward staff after years of hard work -- especially through the Covid-19 crisis -- KKR’s Pete Stavros has long pushed for workers to own more equity to expand their engagement with a company’s future success. KKR, Apollo, Goldman Sachs and Ares are among investors partnering with ‘Ownership Works,’ a organization aimed at increasing employee ownership at companies.

KKR’s Warning

Private equity deals keep churning, so private credit investors still have a lot of room to run. What’s more is that loan issuance to back new leveraged buyouts in the first quarter of 2022 exceeded the same period a year ago, according to KKR.

Part of this comes as uncertainty sweeping through public markets pushes issuers to look for money elsewhere. And uncertainty is far from over. KKR, which had about $184 billion under management in credit at the end of the first quarter, is watching closely for further cracks in the market -- especially when it comes to riskier, high-yield borrowers.

A Bloomberg measure of high-yield corporate bonds shows that spreads have widened to levels not seen since late 2020. Yields on such bonds have risen beyond 7%, compared to a low of 3.5% in July of last year.

“The stark reality of rising rates led to a bit of contagion across the global bond markets,” A KKR team led by Chris Sheldon wrote Friday in a letter to clients. “The market is grappling with how much more spreads can widen but one thing is clear -- the convexity is real.”

Tikehau Capital co-founder Mathieu Chabran, a leveraged finance banker by background, said he believes that credit markets could be sending a signal. “Can there be another leg down? Certainly,” he told us in a Bloomberg Television interview.

“Credit markets have always been a leading indicator of what’s happening in the market, and I think this aspect has been a little bit underestimated. We all know there’s been a lot of leverage put into the system,” he said. “That’s where we should certainly be focusing on.”

More on Wall Street

• Chase Coleman and a group of Tiger Cubs are being crushed by the same stocks that made their hedge funds billions. Bloomberg’s Tom Maloney and Katherine Burton outline the carnage as high-flying technology stocks get burned.
• Elon Musk told an audience on Twitter that his buyout offer was “on hold,” though he’s “still committed” to the deal. That’s just after Bloomberg reported that he’s been seeking additional financing to reduce his margin loan, according to Bloomberg’s Gillian Tan.
• In real time, the crypto markets faced the pain of an algorithmic stablecoin losing its peg to the dollar. Bloomberg’s Emily Nicolle explains how “everything broke.” Meanwhile, I spoke to crypto giants Mike Novogratz and Dan Morehead on TerraUSD and what it meant for them. You can find Novo's interview here.
• Coinbase notified investors of a new risk factor in a regulatory filing, saying crypto assets held in custody could be subject to bankruptcy proceedings, and customers could be treated as general unsecured creditors. The CEO said there’s no risk of bankruptcy for the largest US crypto exchange -- yet, the concept introduced the question of who crypto assets truly belong to at the end of the day.
• Affirm raised its revenue outlook this year, a rare financial technology firm to beat the doldrums of 2022 so far. The CEO joined us for a Bloomberg Television interview.

Be careful out there, folks. It’s Friday the 13th. But the weekend is around the corner and I hope it’s a great one for you. Tips and opinions are so very welcome at [email protected].