Joseph Baratta is the kind of private equity guy who sits in the front seat of the roller coaster, especially when he’s buying one.
When Baratta led private equity giant Blackstone Group’s €102 million ($136 million) deal to buy Merlin Entertainments in 2005, the U.K. theme park group was best known for the macabre London Dungeon, a museum that recreated gory historical events for curious tourists. But with Blackstone’s backing and €3.5 billion in capital, Merlin was soon devouring other attractions — bidding for Legoland and acquiring Italy’s leading theme park operator, aquariums in Asia, Madame Tussauds, and the London Eye. Merlin CEO Nick Varney stresses that without Baratta’s deal-making skills and Blackstone’s capital, the company would have had little chance of becoming what it is now: the second-largest theme park operator in the world, behind Walt Disney Co. Varney remembers Baratta’s detailed due diligence, which included riding the roller coasters at Merlin’s parks and asking intense questions about its business — at least once at 3:00 a.m.
To say that Baratta was working in darkness as he built Blackstone’s European business from scratch before returning to the U.S in 2012 to lead the firm’s global private equity business is somehow both very wrong and very right. Within the cloistered world of private equity, his reputation precedes him. Yet to the larger world — which associates Blackstone with Steve Schwarzman, co-founder, CEO, and multimillion-dollar party-thrower — the name “Baratta” is all but meaningless. “He was in London for more than ten years and hasn’t been a fixture in New York,” explains Hamilton (Tony) James, Blackstone’s president and chief operating officer. James, along with Jonathan Gray and Bennett Goodman, have been mentioned as possible successors to Schwarzman, a topic that has grown more urgent as the founder celebrates his 70th birthday. A man less talked about as a potential CEO-in-waiting is Baratta.
Until now.
Public consciousness equates Blackstone with private equity, but public consciousness is wrong. The firm, founded in 1985 by ex–Lehman Brothers leaders Schwarzman and Peter Peterson, now has $367 billion in total assets, but only $100 billion of that is in private equity, including secondaries and tactical opportunities. Gray runs Blackstone’s $102 billion real estate business; J. Tomilson Hill heads Blackstone Alternative Asset Management (BAAM), a $71 billion hedge fund solutions business; Goodman and Tripp Smith oversee $93 billion in credit strategies. The firm has $101 billion in so-called dry powder, or cash to invest. Blackstone has ventured into experimental territory as well: 50 percent of its assets are in strategies that didn’t exist at the time of its 2007 IPO, which valued the firm at $38 billion. Since 2011, Blackstone has brought in $200 billion in assets, more than its next four largest peers combined.
The firm’s recent acceleration belies its slow beginnings. Peterson and Schwarzman wanted to enter private equity from the start, but with no experience in leveraged buyouts — in contrast to competitor Kohlberg Kravis Roberts, a pioneer in the field from its 1976 founding — they launched Blackstone as a merger advisory firm. Two years later Blackstone raised its first private equity fund and started investing in properties left for dead by the savings-and-loan crisis, which began unfolding in 1986. By the 1990s, Blackstone was becoming a seminal deal maker and expanding into real estate and the fund of hedge funds that would become BAAM.
The next decade would remake Blackstone and the private equity industry. After the technology bubble burst in 2000, institutional investors sought alternative investments, which they believed would behave differently from public stocks and bonds. Private equity managers started raising ever-larger funds. In 2002, Schwarzman’s firm raised $6.8 billion for Blackstone Capital Partners IV, the largest private equity fund at the time.
By the middle of the decade, private equity was minting millionaires and billionaires at a record pace. With the Federal Reserve’s loose monetary policy, the cost to borrow money to fix companies was low, and pension funds and others were funneling record amounts to private equity managers. Blackstone and six others teamed up to acquire technology provider SunGard for $11.3 billion in 2005 — the biggest transaction since the notorious RJR Nabisco deal in the late 1980s. A year later Blackstone led a consortium of private equity firms to buy Freescale Semiconductor in an even bigger deal.
In 2007, Blackstone was one of the first major private equity firms to go public. With the market at an all-time high, Schwarzman wanted to tap the public for permanent capital, even as institutional investors warned that shareholders would demand growth from Blackstone that would hurt fund returns. Soon after the IPO, Blackstone purchased GSO Capital Partners, a credit investment firm. Schwarzman wanted to diversify into investments that would do well in a downturn.
Then the global financial crisis hit. Deals done during the boom years started coming undone. Private-equity-backed M&A dropped 60 percent in 2008 and a further 75 percent in 2009. Blackstone’s stock price cratered. Meanwhile, institutional investors struggled to make good on the commitments to private equity that they had made years earlier.
Blackstone navigated the crisis reasonably well and, remarkably, emerged stronger. Since 2008 the firm has become a juggernaut in deal making, and not just because of its talent. To prevent a repeat of the crisis, global financial regulators enacted rules and prohibitions, including the Dodd–Frank Wall Street Reform and Consumer Protection Act and the Volcker rule, that curbed banks’ risk taking. Blackstone, free of these regulations, stepped in. Since the financial crisis the firm’s assets under management have grown fourfold; its staff has increased from about 1,300 to more than 2,200; and it has entered new businesses, such as credit, secondary investments, and special situations. Schwarzman is now chairman of President Trump’s strategic policy forum.
Behind the scenes sits 46-year-old Joe Baratta. It’s a place he’s comfortable in. During an interview he talks about growing up in Sacramento, California, where his father, a body-builder transplant from Cleveland without a college education, opened a health club in 1951, decades before Jane Fonda or Equinox. Baratta’s father expanded the business, branding the gyms with the name of fitness advocate Jack LaLanne. In a nod to his future private equity career, Baratta says his father could have done quite well being so early to the fitness trend, but he only owned the number of clubs he could manage himself.
Though few of his high school classmates went to college east of the Rockies, Baratta left Sacramento to attend Georgetown University. He played with the idea of politics, but after graduation in 1993 he took a job as an analyst in Morgan Stanley’s M&A group. A year later he decided he wanted to work in private equity. “Private equity was still a cottage industry, so that was a pretty good insight to have as a 23-year-old person in 1993,” he now laughs. Even though he was called back for a second interview at KKR — the most intimidating experience of his life, he says — he took a job with a midmarket private equity firm called McCown De Leeuw & Co. A few years later he joined Tinicum, the family office for industrial deal maker Derald Ruttenberg.
In 1998, looking to join a firm with outside capital, Baratta jumped to Blackstone as a first-year associate. At the time, the firm had about 250 employees, about 25 of them in the private equity group. Blackstone was in the middle of investing its third private equity fund and its second real estate fund. It had just started raising a mezzanine fund. “We had all the pieces, but it was all still small,” Baratta recalls.
In 2001, Schwarzman asked Baratta and David Blitzer (now global head of Blackstone’s tactical opportunities group) to go to London to start a European private equity business. Blackstone’s real estate group had an office there, but the firm had executed only a couple of European private equity investments from New York. In a business still led by many of the men who pioneered private equity in the late 1970s and ’80s, executives earned a lot of street cred if they got their hands dirty early. It was too late to be a pioneer in the U.S., but Baratta could do it in Europe. The two moved overseas with Blitzer at the helm and Baratta as his number two.
“European private equity was two decades behind the U.S. at that point,” Baratta says. “Blackstone didn’t have a name there. People looked down their noses at us; we were just the latest American firm to show up in Europe.” They hired a young team, focused primarily on the U.K., and developed an investment strategy that mirrored what they had done in the U.S. They identified fragmented industries ripe for consolidation, including nursing homes, hospitals, and restaurants. Baratta used the firm’s real estate expertise to differentiate Blackstone from its rivals: Nursing homes and pubs, for instance, often owned the valuable ground beneath their businesses.
Baratta got involved in big deals quickly. Vivendi Universal was selling off companies that a former CEO had bought in a bid to create a new media concern; in 2002, Blackstone partnered with Thomas H. Lee Partners and Bain Capital to buy one of these, U.S. textbook business Houghton Mifflin. Vik Sawhney was an investment banker at the time. “I never met someone who was so passionate and willing to express their concerns about a deal at such a young age,” he now says of Baratta. “As a banker, you just want the deal to be made. But I remember thinking, ‘Who is this guy?’” Sawhney is now the private equity group’s chief operating officer.
The deals kept coming. Baratta invested in Center Parcs, a prominent holiday village in the U.K.; Southern Cross, the U.K.’s largest group of nursing homes; and SeaWorld Parks and Entertainment. But like Schwarzman, Baratta had a gift for timing: From 2006 to 2008, as the industry was expanding and asset prices were hitting highs, Baratta slowed down. And his U.K.-focused strategy helped him avoid problems that competitors faced in Spain and other countries after the crisis.
In 2010, Baratta was made head of Europe. “A mistake a lot of firms make is to take the most prolific deal partner and say, ‘Now we’re going to make you a manager.’ That’s a different skill set,” says Blackstone president James. “Joe excelled. His strengths are pure leadership and great instincts. He’s leaning forward, chest out, quick and looking for action. We’re on our fourth-generation leader in private equity. He’s really smart but doesn’t just sit there and analyze things. He’s on the field, engaged in deals even now, just to keep his hand in.”
In 2012, Baratta was named global head of private equity and returned to the U.S. Sources close to the firm say he was the right pick for the right time, in part because he didn’t want the limelight and Blackstone had plenty of work to do. With crisis-era deals still making headlines, the private equity industry was in a funk. Fundraising was difficult, and the industry still had billions in cash that hadn’t been invested. Blackstone itself took three years to finish fundraising for Blackstone Capital Partners VI, which was started in 2008. “No one wanted to invest with the publicly traded large-cap firms,” Baratta says. “They thought we had peaked.”
Though it had been nicked by the crisis, Blackstone had come through without a major blowup and was even buying businesses. Beyond performance statistics, Baratta needed to show investors that the firm maintained discipline, didn’t sell too early, and produced consistent returns. “We got our investors focused on the volatility of returns within a fund: Did you have two investments where you made eight times your money and 25 where you made nothing or even lost money?” he says. Baratta asserts that Blackstone’s consistent returns could be credited to the firm’s structure: a single global fund with one investment committee, in contrast to the regional or sector-based funds of competitors.
Still, he admits, change was needed. One priority upon his ascension was getting the U.S. private equity group refocused on finding deals themselves instead of waiting for opportunities from bankers — the riding-the-roller-coaster method, in short. “He turned the culture back to its roots as an entrepreneurial and scrappy deal engine,” says Sawhney.
Baratta also wanted to position the firm for the next phase of private equity, which he believed would involve transforming businesses. In the early years of the industry, good returns could be generated with smart people and innovative financing, he says. The private equity industry was built on the back of declining interest rates and good economic growth. “Now you’ve got the reverse trend: You have increasing cost of capital over time as rates go from really low levels to higher levels, and economic growth is a bit more muted than it was in the mid-’90s and mid-2000s.”
Under Baratta, Blackstone invested significantly in operational infrastructure, hiring experts in areas such as procurement, health insurance, and pricing. In 2014 James recruited David Calhoun to head private equity portfolio operations. Calhoun, former CEO and president of GE Infrastructure, had been CEO of Nielsen since 2006, shortly after it was acquired by five private equity firms, including Blackstone.
Calhoun says he specifically chose Blackstone after running a company owned by private equity firms and seeing how each approached the operations role. “They all understood that improving the operations of companies was becoming the most important part of the equation. That’s not a secret,” he says. “But how do you line up resources behind that CEO so they would be better than they would be if they were on their own?” Calhoun says one firm had a series of senior advisers — perhaps retired CEOs — who would fly in and spend a day with a CEO and then fly out. Another used a general consulting model. He found both models limited. By contrast, Blackstone hired specialists — in procurement, for example — who would build those capabilities inside portfolio companies. What sold Calhoun on Baratta was his readiness to add operators to the boards of companies. Historically, the deal origination team would populate the board until the day before the IPO, when industry executives would be added. In a cultural shift, Calhoun wanted operators — say, on the board of an aerospace company — from day one. “Joe had no fear of the social dynamics that could occur between the investor board reps and the operators,” Calhoun says.
Despite Baratta’s rise and the changes he’s instituted in the private equity unit, Blackstone faces challenges. Its stock price, which has doubled in five years, is still 20 to 25 percent below the all-time high it hit in May 2015. Investors, it is suggested, penalize the stock because of the volatility from Blackstone’s irregular sales of portfolio companies and real estate. The stock trades at a multiple between 9 and 11 times the price-earnings ratio; traditional managers trade at about 14 to 15 times earnings. Depending on Schwarzman’s influence, the firm may also face a changed market environment given President Trump’s promise to roll back Dodd–Frank, which aided Blackstone’s growth by hobbling its bank competitors.
Like all firms with an iconic figure at the top, Blackstone needs to deal with succession. With the first generation of private equity executives celebrating retirement-range birthdays, the industry is struggling with leadership — not necessarily because there aren’t enough qualified successors but because the guys at the top don’t want to retire. And why should they? Schwarzman’s role as CEO has put him in the president’s sight lines, and his drive is unquestionable; he’s insisted that his White House role won’t take away from his full-time job, just his sleep. Few people outside the environs of Wall Street have heard of Joe Baratta because he’s not needed — yet.
Blackstone has dealt with succession better than many of its peers. Schwarzman was lauded for bringing in Tony James to handle day-to-day management in 2002. (James is a well-respected, if not beloved, manager who was chairman of global investment banking and private equity at Credit Suisse First Boston.) Among other possible successors are Jonathan Gray, the 47-year-old who has been with Blackstone since graduating from the University of Pennsylvania’s Wharton School in 1992; Bennett Goodman, who co-founded GSO Capital, which has been a home run for Blackstone; and David Blitzer, who went to Europe with Baratta and whose tactical opportunities business runs $17 billion.
“That’s right. Any of those four could take over,” says James of Gray, Goodman, Blitzer, and Baratta. Gray has grown the real estate portfolio to $102 billion, the largest in the world, by making some big bets, including the 2007 acquisition of Hilton Worldwide. Gray is a favorite for succession; he is also reportedly interested in running for public office and was under consideration for Treasury secretary in the Trump administration. Goodman, 59, was granted about $200 million worth of restricted shares in 2015 to give him a larger stake in the firm and encourage him to stay until retirement age.
For now, Baratta — the dark horse in the race to succeed Schwarzman — has his hands full. Blackstone has a $5 billion core private equity fund that it raised to invest in four to five companies that it would hold on to for the long term and produce co-investment opportunities for clients. It’s one year into investing $18 billion Blackstone Capital Partners VII. It also has a $4.5 billion energy fund that coinvests with the main fund.
He’s also busy running a $100 billion private equity business at a time that he says is more treacherous than he’s ever seen: Equities are at lofty valuations, interest rates are likely headed higher, and the uncertainty of the Trump administration’s policies could help or hurt the economy. “It’s a very difficult time to be an investor given how high the public markets are and how hot credit markets are,” Baratta says. “But given our single global fund structure and the fact that we’re making ten to 12 investments globally, we can be highly selective.”
Inside Blackstone, few doubt Baratta’s ability to handle the market’s roller coaster. “He’s forever looking at problems and tackling them in a new way if need be,” says Sawhney. “Sometimes in organizations you treat things like they’re Moses coming down with the tablets. ‘So-and-so did it this way, why change it?’ For Joe good enough is never good enough.”
But in an organization that has so often relied on its own Moses — Schwarzman —the remaining question about Joe Baratta is whether he will be good enough, or ambitious and single-minded enough, to one day lead it.
