Blackstone IPO a trade-off for investors

Blackstone Group LP, the world's largest private-equity firm, is extending an interesting proposal to retail investors: a piece of the action, just not a seat at the table.

The New York-based buyout shop announced plans this past week to raise $4 billion through an initial public offering. Blackstone _ which uses its own investors' money to buy shareholder-owned companies and take them private _ could be valued by some $40 billion once it goes public.

The buzz about an IPO has been escalating since word leaked out more than a week ago. But, some observers are questioning the deal because the new structure will give retail investors little say in a company still operated like a private concern.

Blackstone plans to sell shares in its underlying management company, and not the side of the company that runs its investment portfolio. It will be structured as a limited partnership where investors pay for a piece of the management company's profits.

"I think this is a fascinating moment in a maturing industry that's changing from a mystical back room club into a big public industry," said Matthew Rhodes-Kropf, a professor of finance at Columbia University. "But, you have to question why they're using this point and time to go public."

The IPO marks an entrance into the world of private equity that retail investors have never been given access to. Buying into Blackstone gives investors a piece of an investment management firm whose portfolio includes everything from Madame Tussaud's wax museums to a massive stake in Germany's Deutsche Telekom.

It also sheds a bit more light on the inner workings of unregulated private investment firms.

Until now, only wealthy investors could afford the opportunity to sink cash into private equity firms. They entrust millions of dollars to the firm's strategists without being told exactly how their money will be used, or what the returns will be.

Through the release of Blackstone's IPO documents, the world now knows why investors have such faith in the firm. In less than six years, total assets under management at Blackstone have risen more than fivefold, from $14 billion to $78 billion.

Blackstone's portfolio of companies achieved annual returns of 23 percent since 1987. Its real estate holdings did even better, with 29 percent returns since 1991. This helped boost 2006 profit to $2.27 billion, more than double that of the previous year.

That means each of its 770 workers produced an average of $2.95 million in net income. By comparison, employees at Goldman Sachs Group Inc. _ the largest U.S. investment bank _ each averaged about $360,000 for the company in 2006.

"I thought there was going to be a brownout in midtown Manhattan from all the e-mails going back-and-forth and all the telephones ringing about this deal," said Robert Profusek, head of private equity at law firm Jones Day.

"This is an important development, and a compliment to the firm that it was able to do this and generate so much attention," he said. "But, it isn't something where you'd say the whole world is going to change because it happened. It does change Wall Street."

Blackstone said it considers itself an "alternative asset manager" because it does not trade in public securities and cannot be defined as a traditional investment bank.

However, there is some speculation that Blackstone Chief Executive Stephen Schwarzman is leading the company into direct competition against Wall Street's five biggest investment houses. Goldman Sachs and Morgan Stanley are doing an increasing amount of its business in private equity, while Blackstone is getting more fees from its corporate advisory business.

This could revolutionize the way investors look at a Wall Street player, and introduce a new breed to the mix. And that's enough to get the attention of investors.

"The Blackstone name has enough cache that it will be fairly well accepted," said Janna Sampson, a portfolio manager at OakBrook Investments. "I think it would fit in a diversified portfolio that holds some of the investment banks, but because it's a pure play in private equity, its less likely to tank at the same time as other financials."

So why now? Analysts say a public offering will help transform the firm into a fixture on Wall Street, and solidifies its financial value. It also sets up a line of succession to help guarantee Blackstone's future.

Others say the real question focuses not on what Blackstone is telling us, but what they aren't saying.

Private equity has driven acquisition activity in the past few years, and delivered hefty profits to firms and investors alike. There is some speculation that Blackstone simply wants to cash out on a high note.

Some have interpreted the IPO as a move that could precipitate a drop in global stock markets. Going public means it can tap into a vast swath of cash if private money begins to dry up.

"They need money like I need a hole in the head, this isn't exactly a business with no cash flow," said Rhodes-Kropf. "They already have all the cash they need. The overriding sense is these guys are selling because someone is willing to pay too much."