Friday, March 23, 2007

A Look Inside Blackstone’s Money Machine

Blackstone Group, confirming a firestorm of speculation, said Thursday it would seek an initial public offering that would value the firm at as much as $40 billion. The preliminary prospectus offered a first glimpse inside Blackstone’s closely guarded money machine, which churned out $2.3 billion in profit in 2006. The offering is being structured to allow Blackstone to retain many advantages of a private business — a setup that Breakingviews compares with Berkshire Hathaway under Warren Buffett.
Using data from Thursday’s prospectus, Bloomberg News calculates that Blackstone’s 770 employees generated almost nine times more earnings per person in 2006 than their counterparts at Goldman Sachs, Wall Street’s most-profitable investment bank.
Blackstone’s I.P.O. is a role reversal for an industry that has long espoused the benefits of private ownership. It also comes amid a boom in buyout activity, which has led some industry watchers to wonder if Blackstone is trying to cash out at the top.
The New York Times’s Jenny Anderson suggests that a Blackstone I.P.O. will solve one issue associated with hyperkinetic private financial-service firms: crystallizing value.
But Time magazine’s Michael Kinsley likens the offering to “selling full-price tickets to a ball game in the ninth inning, as the stock market fizzles out.”
Breakingviews sees potential problems in Blackstone’s proposed ownership structure, writing that it will only “worsen the ‘agency problem’ — the separation of ownership from management –that [Blackstone chairman Stephen] Schwarzman has so loudly complained about in the past.”
Mr. Schwarzman will trade all of his current shares in the company for new shares that vest over a four-year period, The Times writes. He will receive a $350,000 salary and performance fees from the firm’s investments.
His partners, however, have cut a different deal: they will own shares in the public company, but they will also continue to receive income directly from the firm’s investments, aligning their interests more closely with the firm’s limited partners like pension funds.
Ms. Anderson notes that Blackstone principals will do very, very well if the offering comes off. Public market investors, she says, will have to determine if they can imitate any fraction of that success with the very little information and very limited voting rights Blackstone seems to be providing them.
Underwriters on the Blackstone offering include Morgan Stanley and Citigroup, but not Goldman Sachs, UBS or J.P. Morgan Chase.
The New York Post speculates that the banks left out of the Blackstone deal may be busy preparing an offering from another big buyout firm — possibly Kohlberg Kravis Roberts.
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