You may not have heard of Blackstone, but you will be familiar with what it owns. The US financial group counts the Savoy, Connaught and Berkeley luxury hotels among its assets and is in the process of selling Claridge's, its iconic Mayfair hotel. It was a major shareholder in Liffe, the London International Financial Futures and Options Exchange, before selling out to Euronext. It has just snapped up £2.5bn worth of pubs and restaurants from Scottish & Newcastle and, in Germany, the €3.1bn (£2bn) chemicals group Celanese. And while it lost bidding competitions for UK retailers Debenhams and Selfridges to rival financial buyers last year, it is now rumoured to be in talks to buy €1bn worth of pharmaceuticals businesses from Aventis, to help the French drugs company ward off a €50bn hostile bid from Sanofi.

You may not have heard of Blackstone, but you will be familiar with what it owns. The US financial group counts the Savoy, Connaught and Berkeley luxury hotels among its assets and is in the process of selling Claridge's, its iconic Mayfair hotel. It was a major shareholder in Liffe, the London International Financial Futures and Options Exchange, before selling out to Euronext. It has just snapped up £2.5bn worth of pubs and restaurants from Scottish & Newcastle and, in Germany, the €3.1bn (£2bn) chemicals group Celanese. And while it lost bidding competitions for UK retailers Debenhams and Selfridges to rival financial buyers last year, it is now rumoured to be in talks to buy €1bn worth of pharmaceuticals businesses from Aventis, to help the French drugs company ward off a €50bn hostile bid from Sanofi.

As well as being one of the world's leading private equity firms, Blackstone has a big restructuring advisory unit and is beefing up its M&A activities. The firm landed the role as Enron's lead, post-collapse, restructuring adviser and also led revamps for the document company Xerox and the telecommunications group Global Crossing - although it turned down the job of advising a post-meltdown Parmalat.

Driving Blackstone forward is Hamilton James, 52, its vice- chairman. Although he only joined two years ago, he is viewed as the heir-apparent to the firm's co-founders - Stephen Schwarzman, 57 a former Lehman Brothers banker and Wall Street heavyweight, and Peter Peterson, 77 the former US Secretary of Commerce under Richard Nixon and an ex-Lehman chairman.

As Blackstone ballooned in size, Schwarzman and Peterson took the unusual step for the firm of recruiting their right-hand man from outside. His credentials, though, were impressive: he was Credit Suisse First Boston's chairman of global investment banking and private equity and, before the 2000 merger with Donaldson, Lufkin and Jenrette, chairman of the banking group at DLJ. He is known on Wall Street for his people skills and unassuming manner - attributes that must come in handy when dealing with the "master of the universe" complexes that permeate the private equity industry.

James has lost no time in making his mark on Blackstone. Flouting the usual cloak-and-dagger modus operandi of many private equity houses, one of his first moves was to replace the internal walls in the firm's headquarters on New York's Park Avenue with glass. He has similar interior design plans for Blackstone's new London offices in Berkeley Square. "I wanted to send the message that we are all in it together - that we are partners, even the junior people. We all own the business, manage the business and care about the business, and want it to succeed. Closed doors and barriers are counter to that feeling," he says.

Such grassroots sentiments may be a new departure for a firm that has muscled its way to the top of a cut-throat industry. Schwarzman and Peterson started Blackstone as an M&A boutique in 1985, with a capital pool of just $400,000. Today, it has more than $13.5bn (£7.3bn) in private equity, real estate and debt management funds being invested and a further $8.5bn under management in a fund of hedge funds. It overtook Kohlberg Kravis Roberts as the world's biggest private equity firm in 2002, when it raised a $6.5bn fund.

Blackstone's targets all have something in common: they tend to be neglected, under-developed companies with potential. "Our approach is to buy under-managed assets, stabilise them, fix them up and sell them on within three to five years," says James. The Savoy hotel group exemplifies this strategy: since acquiring it, Blackstone has lavished £85m on refurbishment and hired celebrity chef Gordon Ramsay to revitalise Claridge's now-illustrious restaurant. Claridge's is expected to fetch more than £300m - a massive gain considering Blackstone paid £520m for the entire Savoy Group in 1998. Following rumours of bidding interest from other hotel chains, speculation is intensifying that Blackstone could now sell the group, with a mooted price tag of £800m.

Europe has become the focus of attention for Blackstone over the past few years, as it has at fellow US private equity powerhouses Texas Pacific Group (owner of Debenhams) and Carlyle (owner of former Ministry of Defence research unit Qinetiq). "Europe is an exciting market for us," says James. "There is so much opportunity here, so many large industrials with mixed bags of businesses that have no strategic rationale to be together. And these industrials are under shareholder pressure to pare off non-core assets and focus on core businesses, creating a raft of targets for us to buy. Europe is critical to our development as the world's leading private equity firm. More than half our investments last year had a European component and we expect this year to be the same."

Although the belief that corporate M&A activity has returned is growing, fuelled by blockbuster deals such as the $54bn move on Disney by cable operator Comcast and Sanofi's bid for Aventis, James rejects this theory. He does not expect bidding competition to stand in Blackstone's way.

"I don't think corporate buyers are really back. There have been a few big deals but it is not as broad-based as some suggest. Chief executive officers are still focused on internal issues, plus all the accounting scandals have made them nervous. The expansive mindset just isn't there right now for corporate CEOs. 2004 will be another huge year for private equity firms: we will dominate acquisition activity in Europe."

Not even the weak US currency appears to threaten Blackstone's acquisitive ambitions in Europe, even though the firm, like most US private equity houses, raises its funds in dollars. Instead, James maintains it is business as usual. "No one at Blackstone thinks the dollar is going back to parity [with the euro] any time soon and a lot of our people feel that it could even weaken further. So on that basis, we should be buying even more in Europe, not less, at the moment. Currency is just another risk. We are in the business of taking much bigger risks than that one."

Somewhat frustratingly for the firm, it only started to invest heavily in Europe a few years ago, so it is unable to take full advantage of the currency differential by selling off assets now.

"Apart from the Savoy Group, most of our European portfolio is fairly new," says James. "We are getting lots of proposals from banks looking to manage sales or public offerings of our private equity assets, but given that we keep assets in our portfolio for three to five years, for most of our European deals it is just too early to exit." James says.

So what is next on Blackstone's radar screen? "We are omnivorous in our choice of target, but at present we see lots of opportunities in telecommunications, chemicals, healthcare, hotels, real estate and UK retail and pubs. We lost out on Debenhams and Selfridges, but we are still looking at some other retailers in the UK," he says.

Only when Blackstone has finally sold an asset on can it be judged a successful - or otherwise - investment. And the firm does have a few blots on its copybook, losing its investors millions through failed investments in Germany's cable TV sector. But looking across its broad range of investment activities, restructuring and M&A advisory units, Blackstone's business strategy places it in pole position to exploit today's volatile financial climate. "Our advisory units complement our investing businesses perfectly," says James. "It means that we can do business in both the good times and the bad. It's a win-win strategy."

BIOGRAPHY

Born: 1951.

Education: BA from Harvard College in 1973; MBA with high distinction from Harvard Business School and graduated as a Baker Scholar in 1975.

Career (first job, 1975): Investment banking associate, DLJ.

1982: Appointed head of DLJ's global M&A group.

1995-2000: Chairman of DLJ's banking group.

2000-02: Chairman of CSFB's global investment banking and private equity group.

2002 to now: Vice-chairman, the Blackstone Group.

Hobbies: Fly fishing, skiing, soccer, racquet sports.