Blackstone Going Public—Its Own Way

The private equity firm plans to raise $4 billion in its initial public offering, but vows not to change its management approach

by Matthew Goldstein and Aaron Pressman

The Blackstone Group made it official late on Mar. 21, filing with the Securities & Exchange Commission to raise $4 billion in the most highly anticipated initial public offering since Google (GOOG) went public in August, 2004. But just because Blackstone is looking to tap the public markets, that doesn't mean this once highly secretive private equity behemoth is completely changing its stripes.

The opening lines of the 330-page IPO prospectus make clear that Blackstone, led by Chief Executive Stephen Schwarzman, is not going to play by Wall Street's traditional rules for public companies. The company, whose shares will trade on the New York Stock Exchange (NYX), says in its prospectus: "We intend to continue to follow the management approach that has served us well as a private firm of focusing on making the right decisions about purchasing and selling the right assets at the right time and at the right prices, without regard to how those decisions affect our financial results in any given quarter." Blackstone also warns if you can't stand lumpy returns, then stay away.

In other words, Blackstone may be going public, but it plans to go public in its own way.

Revealing Document

For now, Blackstone isn't saying how many shares it intends to sell in the offering, nor does it suggest a price for those shares. It doesn't even propose a ticker symbol for its stock. The firm does say that some of the proceeds from the offering will be used to buy out the "equity interests" from some of its current owners, which include insurance giant American International Group (AIG). The filing doesn't indicate whether any current owners will be selling shares in the offering.

But the IPO filing does reveal a great deal about how Blackstone became the behemoth that is. Blackstone is really four firms: a giant private equity buyout firm, a real estate management firm, a hedge fund conglomerate, and a financial adviser. But more than anything, the New York-based investment firm is a phenomenal asset-gobbling machine, with its private equity and real estate operations managing about $49 billion in assets.

In less than six years, total assets under management at Blackstone have risen more than fivefold, from $14 billion to $78 billion. To put that in perspective, Blackstone manages more assets than all of these well-known hedge funds combined: D.E. Shaw Group, Atticus Capital, SAC Capital, and Citadel Investments.

Lucrative Fees

The draw has been Blackstone's returns. The offering documents show that the firm's limited partners—the pension funds, endowments, and others who invested in its private equity funds—have earned 23% a year after fees since 1987. Real estate fund limited partners have done even better, earning 29% annually since 1991.

Blackstone knows how to generate fees for itself too, mostly from its management activities. In 2006, the firm took in $852 million in fund management fees, more than twice the amount it generated in 2005. Overall, Blackstone's revenues, which also include advisory fees, totaled $1.12 billion in 2006.

Revenues from management activities and corporate advisory work are only a small part of the story at Blackstone. Last year, the firm raked in $7.59 billion from its investment activities, representing a 48% gain over 2005. Less taxes and expenses, Blackstone posted a profit of $2.27 billion in 2006, compared to a profit of $1.33 billion in 2005.

On a Roll

While the firm's fees are heady, there are some pro-investor features. The firm earns 1% to 2% of each fund's assets as a management fee, while the assets are being invested (see BusinessWeek.com, "Blackstone Mints Money—Well, Duh"). But after that period, the fee drops to 0.75%.