Private-Equity King Blackstone To Test Roiling Public Waters
Friday, June 22, 2007
Blackstone Group's business of buying and selling huge companies is all about making billion-dollar bets. And today, the private-equity giant is taking its biggest roll of the dice yet. In the face of a looming fight with Congress, labor union protests and other hype, the first shares of Blackstone will trade on the New York Stock Exchange under the symbol BX.
Shares are so oversubscribed that some Wall Street analysts fear that irrational exuberance will send investors tripping over themselves to get the first publicly traded piece of the private-equity boom.
The IPO sets Blackstone's market value at $33.6 billion, or $31 a share, making the offering one of the biggest in Wall Street history. Reminiscent of the heady dot-com days of the late 1990s, the offering -- which surpasses those of Goldman Sachs and Google -- puts billions of dollars worth of stock and hundreds of millions in cash into the pockets of Blackstone's top executives.
Whether average investors will see a slice of those riches is less clear.
Blackstone faces no greater threat to its future profits than its game of brinkmanship with Congress. The confrontation has all the makings of a Wall Street vs. Capitol Hill classic. On one side is Blackstone co-founder and chief executive Stephen Schwarzman, 60, an aggressive, no-holds-barred billionaire who built a wildly successful business from just $400,000 in seed money. On the other is a budget-strapped Congress looking for tax revenue. And Schwarzman, with a penchant for flaunting his billions and a well-known strategy of avoiding taxes, essentially has painted a target on his own back, analysts say.
Caught in the middle are the regulators. It is highly unusual for Congress to pay so much attention to one firm's offering, yet lawmakers repeatedly have asked the Securities and Exchange Commission to delay the IPO.
Yesterday, Rep. Dennis Kucinich (D-Ohio), who is running for president, and House Oversight and Government Reform Committee Chairman Henry Waxman (D-Calif.) asked the SEC to delay the IPO so Congress could study the risks involved with Blackstone's unusual limited-partnership structure. The lawmakers wrote in a letter to the SEC that the IPO presents "potential investors and the public with new and undisclosed risks, while stripping them of necessary protections."
Sen. James Webb (D-Va.) took his shot on Wednesday. He also requested a delay for the IPO, but for national security concerns over the Chinese government's first-of-its-kind, $3 billion investment in the firm. Webb said he was worried that China could get access to sensitive technology being developed by companies Blackstone owns.
Last week, Senate Finance Committee Chairman Max Baucus (D-Mont.) and Charles E. Grassley (R-Iowa), the panel's ranking minority member, introduced a bill that would force private-equity firms to pay taxes at the 35 percent corporate rate if they went public as limited partnerships. Blackstone is taxed at the lower capital-gains rate of 15 percent. The bill would give Blackstone a five-year grace period. A similar bill without the grace period was introduced in the House on Wednesday.
None of those moves stopped Blackstone from its IPO launch, which was accelerated by a week. The SEC had the power to delay the IPO, but spokesman John Nester said the agency could do so only if Blackstone's filings contained "material misstatements or omissions."
Sen. Jim DeMint (R-S.C.) took issue with the moves against the IPO, saying his colleagues were "singling out Blackstone" and "seem politically motivated." Sen. Christopher J. Dodd (D-Conn.), another presidential candidate, said he wanted to examine the legislation's effect on the "markets and the broader U.S. economy."
Blackstone said the Senate Finance Committee bill would have a "material" impact on its future earnings. But the risks for the firm go beyond the bottom line, analysts said. Blackstone could also find it difficult to retain top talent if its partners have to pay higher taxes than executives at private-equity firms that are not public.
Congress is preparing other bills, sparked by the Blackstone IPO, that could significantly change how the income of all private-equity firms, hedge funds and many investment banks is taxed.
The enormous wealth associated with private equity has put a spotlight on the unequal wealth distribution between rich and poor. Labor unions say that executives like Schwarzman pay taxes at lower rates than firefighters or teachers. Civil rights activist Jesse Jackson raised race as an issue after meeting with Blackstone's legal team yesterday. He said not enough minority-owned firms have been included in the IPO.
Colin Blaydon, director of the Center for Private Equity and Entrepreneurship, said he was not surprised by the reaction. "If you have a combination of great wealth being created and an ignorance about how it was done, and therefore a willingness to suspect the worst, you have a perfect storm for an incredible backlash that . . . Blackstone is now seeing," he said.
Blackstone was founded in 1985 when Schwarzman and his partner, Peter G. Peterson, began pooling money from super-wealthy investors and big institutions such as pension funds. They bought, turned around and sold companies. Blackstone -- which derived its name from "Schwarz," which means black in German, and "Peter," which refers to the original Greek for "stone" -- remained a small boutique firm for alternative investments until 2002. Since then, the company has exploded in capital and activity.
In the past six months, Blackstone has emerged as the most visible player in the sector, swinging record deals and setting the trend for other private equity firms. Just yesterday, Kohlberg Kravis Roberts took steps to file its own public offering.
With $88 billion worth of assets under its control, Blackstone is the largest private-equity firm in the world, leapfrogging rival Carlyle Group of the District this year. Schwarzman's lavish lifestyle, including his well-publicized 60th birthday party in New York, has drawn even more attention to Blackstone.
"Schwarzman's personality is such that he's like a pit bull," said David Menlow, president of the independent research firm IPO Financial Network. "He's very tenacious, and he's brought that success into Blackstone. I think Congress has gone after him because of his perceived ego and how [he] apparently holds himself above everyone else. . . . But this is a man who has put together a juggernaut."