Blackstone IPO Nets $4.13 Billion
By Emma Trincal, Senior Financial Correspondent | Friday, June 22, 2007
NEW YORK (HedgeWorld.com)—In the Blackstone vs. Washington saga, Blackstone is winning, so far.
Despite being under intense scrutiny on Capitol Hill, Blackstone Group LP, the behemoth private equity firm, priced its Initial Public Offering at $31 per common unit, at the high end of its expected price range, yesterday [June 21]. It is the second time a U.S. private equity firm has gone public after Fortress Investment Group listed its shares in February Previous HedgeWorld Story. With 133.33 million units placed as part of the offering, Blackstone's IPO proceeds amount to $4.13 billion. The units will trade this morning [June 22] on the New York Stock Exchange.
At such price, Blackstone ranks among the largest IPOs in the United States. "The IPO is a huge success", said Francis Gaskins, an IPO analyst at Los Angeles-based IPODesktop.com, a research group. The deal, Mr. Gaskins noted, is 50% bigger than the high-profile IPO of Google, the Internet search engine, in 2004.
"It's a good time to be in the deal industry," said Jim Abbott, a lawyer who heads up the business transactions group at law firm Seward & Kissel. "Smart people don't pick their timing wrong. If they go public, it's because it's a good time to do it."
So much for speculation that Blackstone's IPO was in jeopardy when the Senate Finance Committee introduced a bill last week proposing to tax private equity firms and hedge funds as corporations, hiking their tax rate to 35% from 15% Previous HedgeWorld Story. The proposed legislation and its timing were perceived on the Street as a direct attack against Blackstone's Chief Executive, Stephen Schwarzman. In a matter of days, the bill was quickly nicknamed the "Blackstone bill."
Since then, Mr. Schwarzman and his partners came under intensified pressure from Congress. Rep. Charles Rangel (D-N.Y.), chairman of the House Ways and Means Committee, applauded the Senate's bill. On Wednesday [June 20], Rep. Peter Welch (D-Vt.) introduced its own harsher version of the bill, eliminating the five-year grace period provided by the initial Senate proposal. "There is absolutely no reason some of the richest partnerships in the world should be able to rip off American taxpayers because of a gaping loophole," Mr. Welch said in a statement prior to Blackstone's IPO. Max Baucus (D-Mont.), chairman of the Senate Finance Committee and co-author of the Senate tax bill, said in a statement that he was open to discussing the idea of shortening his proposed five-year transition period.
Even yesterday [June 21], a few hours before Blackstone priced its offering, two representatives, Domestic Policy Subcommittee Chairman Dennis Kucinich (D-Ohio) and Oversight and Government Reform Committee Chairman Henry Waxman (D-Calif.) joined the fray and released a letter to the Securities and Exchange Commission urging the commission to postpone the offering.
For some, the sudden emergence of such negative sentiment from Washington was dazzling.
"This is a witch-hunt. It's Blackstone vs. Washington," said David Menlow, founder of IPO Financial Network, a Millburn, N.J.-based IPO research firm.
By disclosing their hefty compensation, Mr. Schwarzman and his colleagues may have unwillingly started a controversy. Seeking a public listing, they had no choice of course but to disclose such information to the public through SEC filings, which is why many hedge funds and private equity firms are simply ruling out the IPO option. The press took note of Blackstone's S-1 filing last week, in which the firm revealed that Mr. Schwarzman stood to be worth $7.5 billion after the listing Previous HedgeWorld Story.
While it's hard to say whether this public disclosure of wealth triggered some reactions in Washington, it certainly helped fuel a negative sentiment on private equity riches and contributed to make the IPO even more controversial.
"Politicians all like to spend money and you've got to have money to spend money," Mr. Abbott said. "But you don't want to be seen as raising taxes. Politically, being able to say: ‘We didn't raise taxes, we fixed a loophole' is a freebie."
By introducing the tax bills, lawmakers led some analysts to believe that Blackstone might have to discount its offering price. The firm itself in a recent filing had acknowledged that the newly created tax risk would decrease the company's valuation.
The speculation continued into this week with some reports suggesting that the Senate Finance Committee might go so far as to revise the taxation of the carried interest—the 20% performance fee—which is the bread and butter of hedge fund and private equity managers.
Ernst & Young published a note this week cautioning its clients on the public listing of private equity and hedge funds. "In light of this proposed legislation, private equity and hedge fund managers that are considering public issuances of their interests may want to reconsider their economic analysis given the potential increased tax burden," wrote Howard Leventhal, partner in Ernst & Young's global hedge fund practice along with his colleague David Racich, senior manager.
Other factors besides politics clouded Blackstone's IPO, as well. One of them was simply the market picture in the United States. "We aren't recommending that our clients buy shares at the Blackstone IPO. In addition to the usual concerns about possible corporate taxation and lack of experience being a public company, we think the bloom is off the rose for mega buyouts and are very substantially underweighting that sector of the private equity market," said Gregory Curtis, chairman of Greycourt & Co., Inc., a Pittsburgh-based family office, in an email. With interest rates moving up and credit spreads as tight as they are, the financial conditions to secure loans and finance those deals have indeed worsened.
Finally another negative was one key structural aspect of the transaction itself. Blackstone, in issuing common units instead of shares, was not offering voting rights to its investors, a difference that might put off many potential buyers.
Despite all those hurdles, the pricing was still successful. Indeed, on top of the $4.13 billion in proceeds from the IPO, Blackstone is also getting $3 billion from the Chinese government, which bought a stake in the company last month Previous HedgeWorld Story. "It's not a $4 billion IPO. Overall, Blackstone is getting $7 billion off the table," said Mr. Gaskins. The deal was between seven and 12 times oversubscribed, according to IPO analysts.
A few simple facts explain why the deal was so popular. Blackstone, with $88 billion under management, is a powerhouse that completed some record-breaking deals, such as the acquisition last November of Equity Office Properties Trust for $36 billion including debt.
Blackstone's corporate private equity funds have generated a 22% annual return since inception in 1987, according to pre-IPO filings. The real estate funds have yielded 31% annually since 1992. That kind of performance in the alternative investment universe is hard to match.
"The very real possibility of these [private equity] groups paying tax at the corporate level has not dampened investor interest because they are such fundamentally sound investments. On an apples-for-apples comparison (i.e., against other public companies,) Blackstone is still a great investment," said Jay Gould, a San Francisco-based partner with law firm Pillsbury Winthrop Shaw Pittman LLP.
And there is also the Asian factor. According to some IPO research analysts, a lot of the demand for the units came from overseas. The Blackstone deal offers something unique: a door to Asia. "The U.S. private equity market is negative as there are too many deals. But the Asian markets for leveraged buyouts and real estate are untapped compared to the mature U.S. market," said Mr. Gaskins.
Blackstone succeeded in doing what many private equity firms would certainly like to do as well: Partner with the Chinese government. "I wouldn't be surprised if the Government of China ended up giving Blackstone money to manage," Mr. Gaskins said. "China could easily give them $50 billion. It makes a lot of sense. They're partners now. They might as well let Blackstone manage their money in China doing what Blackstone has been successfully doing in the US."
If his prediction turns out to be true, the value of the Blackstone shares would be enhanced through the additional management fees and carried interests.
"The Chinese Government has bought itself a window in the private equity business. I don't know any other private equity player whose partner is the Chinese government," Mr. Gaskins said.
Another advantage for Blackstone: The proposed legislations may never make it through Congress, and many potential investors know that.
"I don't think those bills will pass. They would have a chilling effect on other partnerships in sectors such as energy or real estate and people know that it would drive business offshore and that tax revenues would decline," said Mr. Menlow.
"Without the support from [Democrats Charles] Schumer and [Hillary] Clinton, two powerful senators, this tax bill will have a hard time passing. Schumer and Clinton get a lot of money from Wall Street and they have been obvious by their silence: They don't want to bite the hands that feed them," Mr. Gaskins said. "The two big groups that give a lot of campaign contribution money to Washington, the oil and gas industry and Wall Street, will fight this tax bill."
Some investors who attended the roadshow and won't participate in the Blackstone IPO may be interested in buying later.
"One of our analysts met with Mr. Schwarzman Wednesday [June 20] and was very impressed. We're not going to go to the IPO because it's seven times oversubscribed. But we're seriously considering it for the future," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. He added that the lack of voting rights creates issues because Harris requires equal voting rights when investing in a company. But he is hopeful those internal compliance obstacles will be resolved down the road.
While Blackstone succeeded in pricing its deal on the high-end of the range due to strong demand, success is not a guarantee until the stock actually trades in the market. "What's important is Friday's trading," said Mr. Menlow. "You don't want to see what happened with Fortress Investment Group LLC." Fortress, which went public in February was priced at $18 and opened at $35. Since the IPO, it has traded as low as $23. It closed at $25.88 yesterday [June 21]. "You don't want the stock price to jump up at the opening. I'd like to see it open at a 10-20% premium and close higher than the opening," said Mr. Menlow.
Morgan Stanley and Citi are the lead underwriters of the deal. Merrill Lynch & Co., Credit Suisse, Lehman Brothers and Deutsche Bank Securities are joint book-running managers of the offering.
