By E Hester and J Kelly, Bloomberg
New York : Blackstone Group LP plans to raise $4 billion in an initial public offering, giving investors a first look at the moneymaking power of the firm that manages the world’s biggest leveraged buyout fund.
Documents filed yesterday with the US Securities and Exchange Commission show Blackstone earned $2.27 billion in 2006, 71 % more than a year earlier. Money-management fees were $1.12 billion and investment gains totaled $7.59 billion, as the firm’s private-equity funds returned 24 % and its real estate investments almost doubled.
Not only did New York-based Blackstone make more than Bear Stearns Cos. last year, by at least one measure its profitability dwarfs every company on Wall Street. Each of Blackstone’s 770 employees produced an average of $2.95 million of net income, almost nine times the mean at Goldman Sachs Group Inc., the highest-earning securities firm in history.
“Blackstone is an amazing story,” said Jonathan Insull, a managing director at New York-based TCW Asset Management Co., which runs almost $4 billion in bank loans. “They have built up a terrific franchise in private equity.”
The company, founded in 1985 by Stephen Schwarzman and Pete Peterson, will sell a minority stake in the largest-ever IPO by a US buyout firm. Blackstone said the offering will give it capital to expand into new, unspecified businesses or buy out partners as they leave.
“They’ll get a potential source of permanent capital, where they can capitalize on their earnings and provide some liquidity to their partners over time,” said Frederick Joseph, managing partner of Morgan Joseph & Co. and former chief executive officer of Drexel Burnham Lambert Inc., the biggest LBO financier of the 1980s. “It’s a potential source of capital if they want to broaden what they’re doing.”
Should Blackstone fetch the same valuation as Fortress Investment Group LLC, the private-equity and hedge-fund manager that went public on 8 February, it would trade at 37 % of its $78.7 billion in assets under management, or about $29 billion. If investors value it like Goldman, at 10 times earnings, its market capitalization would be $23 billion.
“Ideally, you would break it down into the particular business components and apply some kind of industry multiples and factor in their growth rates,” aid James McBride, who helps manage about $400 million as vice president of Trendstar Advisors LLC in Overland Park, Kansas. “A lot of it depends on the management. Its the guys running this entity that you’re really believing in.”
Under CEO Schwarzman, 60, and Senior Chairman Peterson, 80, both former Lehman Brothers Holdings Inc. bankers, Blackstone has invested $33 billion of capital in 321 private-equity and real estate transactions with a combined value, including debt, of $293 billion. Blackstone’s funds currently own companies with 375,000 employees and $83 billion in annual sales.
The lowest borrowing costs in a decade have allowed LBO firms like Blackstone to do deals faster than ever. The $144.7 billion of private-equity deals and management buyouts announced this year is ahead of last year’s record pace by 14 %, data compiled by Bloomberg show.
Blackstone in February bought Equity Office Properties Trust for $23 billion and $16 billion in assumed debt. That deal, then the largest LBO of all time, was eclipsed before the month ended as Kohlberg Kravis Roberts & Co. and TPG Capital agreed to acquire power producer TXU Corp. for $45 billion in stock and debt.
Now, Blackstone is raising $20 billion for a new fund, the industry’s largest ever, and as of 1 March had $18.1 billion in commitments, according to the IPO filing.
LBO firms typically use a mix of cash from investors plus their own money and debt secured on the targets they buy to finance deals, then generate a return for investors by selling the assets to other funds or public investors within five years. Blackstone said its private-equity funds have returned an average 23 % a year, after fees, and its real estate investments have gained 29 %.
Schwarzman and Peterson, who led Blackstone into private- equity in 1987 and broadened into real estate in 1991, have expanded into hedge-fund investing, private debt and mutual funds. Private equity remains the firm’s top moneymaker, with $1.01 billion of pretax profit in 2006. Real estate produced $902.7 million, followed by investment banking at $194 million and alternative-asset management at $192 million.
The diversification push has made Blackstone look increasingly like Wall Street firms such as New York-based Goldman Sachs and Morgan Stanley.
“This is yet another example of how the markets have taken over banking functions,” said Martin Mayer, a guest scholar at the Brookings Institution and author of “The Bankers” (Ballantine Books, 1975). Blackstone is “a sort of pirate’s monastery,” he said.
Each of Blackstone’s employees will get a stake in the company when it goes public. New unitholders will have a limited say: They won’t elect the general partner or directors, a right the founders will keep.
“I don’t think there’s any benefit to anybody except the people who are partners in this firm who’ll be able to cash out,” said Mayer.