By AR SORKIN and P EDMONSTON, NYT
Private equity may soon be going very public.
The Blackstone Group, the world's largest private equity firm, is preparing for an initial public offering that could value the firm at more than $30 billion, according to executives briefed on the plan, though a final decision to proceed has not yet been made.
If Blackstone proceeded, it would be the first time a titan of private equity has sought a public listing. It may herald similar offerings by the other big names -- the Carlyle Group, Kohlberg Kravis Robert & Co. and Apollo Group -- which have all studied the possibility in recent months.
A public offering by Blackstone would be a remarkable about-face for an industry that has long extolled the virtues of being private. Executives in private equity have criticized the public markets for being overly regulated and shareholders for focusing too much on short-term earnings.
Indeed, the firms promote themselves as a haven from a finicky public. Just last month, Blackstone's co-founder, Stephen A. Schwarzman, told an audience of investors that "public markets are overrated."
As a public company, Blackstone would be subject to the same kind of scrutiny that it has tried to avoid. The compensation and perks of its executives, some of whom are routinely paid more than $50 million a year, would also have to be disclosed. Schwarzman, who owns as much as 40 % of the firm, is said to regularly pay himself in excess of $300 million annually, according to people close to the firm.
The spoils of Blackstone's offering, which would probably sell about 10 % of the firm to the public, would go to only about a dozen executives who own stakes, including Schwarzman and the firm's other co-founder, Peter G. Peterson, a former chairman and chief executive of Lehman Brothers and commerce secretary under President Richard M. Nixon. Schwarzman's windfall could be worth several billion dollars. A public sale would come as Schwarzman himself has attained a much higher public profile. He was crowned "the new king of Wall Street" on the cover of Fortune magazine and recently held a 60th-birthday party that was attended by hundreds of prominent figures from business, media, politics and the arts.
Yet the possibility of an offering may also signal that Schwarzman believes that the buyout market has peaked. He has acknowledged that the firm's returns will probably be lower in the future.
Rob Lutts, founder and chief investment officer at Cabot Money Management, said, "One word of caution: These guys are usually experts in timing markets -- so this may be a shorter-term peak in the performance of these private equity funds."
A spokesman for Blackstone declined to comment.
It is still possible that the firm, which was founded in 1985, could remain private, people briefed on the plans said.
A surge in buyout activity in the last few years has showered Blackstone and other private equity firms with billions of dollars in fees and allowed them to raise record-breaking amounts for ever-larger deals. Last month, Blackstone acquired the Equity Office Properties Group in what was then the largest leveraged buyout in history, only to be eclipsed by the $45 billion takeover of TXU just weeks later. Now Blackstone is about to complete a new $20 billion private equity fund.
Blackstone currently manages $28 billion in private equity funds, $16.7 billion in hedge funds, $13 billion in real estate funds and $6.5 billion in debt funds. The firm also has a restructuring practice that has advised companies in bankruptcy, including Enron, and a mergers and acquisitions advisory business.
A public sale would allow Schwarzman and his lieutenants to cash out at top dollar, but could make it more difficult for the firm to retain top talent in the future because younger executives would not have the opportunity to own big stakes in the company.
In an offering, Blackstone would be selling an interest in its management company, essentially giving public shareholders a interest in the general partnership -- but not direct stakes in the companies it has acquired on behalf of its investors like the California public pension fund Calpers and other big pension funds.
Investors would be buying into Blackstone's stream of management and performance fees. Its value would depend on its past and future growth rate and its expense structure, including how much of its fees go toward paying employees.
As a result, the firm could face pressure to keep raising new and bigger funds to produce bigger fees. The firm may also push hard to charge more "deal fees" from its investors and to flip its investments even more quickly. For example, when Blackstone bought Equity Office, it collected a deal fee worth 1 % of the acquisition -- about $200 million -- for buying the business.
Blackstone's approach to an offering differs from the tack Kohlberg Kravis took last year when it raised $5 billion last year for investments through a public stock offering of an affiliate in Europe. That offering allowed shareholders the opportunity to invest alongside traditional public equity investors like pension funds. Schwarzman said in a speech last month that the Kohlberg Kravis offering had "destroyed the market for anyone else" who was considering an offering.
A Blackstone offering would most likely mirror that of the Fortress Investment Group, a firm that runs hedge funds and private equity funds. Fortress, with about $26 billion in assets under management, made its debut on 8 February and its shares soared nearly 68 %, giving it a market value of $14 billion. Its market value has since declined to about $10.7 billion. Shares of Fortress fell 37 cents Friday, to $25.74. Citigroup and Lehman Brothers are expected to lead the offering, though virtually every big investment bank on Wall Street was working the phones and angling for a role after the possibility of the offering was reported yesterday by CNBC.
The public offering strategy is being overseen by Robert L. Friedman, Blackstone's chief administrative officer and chief legal officer. Friedman, a former partner at Simpson Thacher & Bartlett, is working with that firm to draft a preliminary prospectus.