Posted by: Aaron Pressman on March 22, 2007
So the amazing, stunning, shocking day has finally arrived. Private equity pioneer Blackstone Group filed a registration statement to go public and raise $4 billion. What did we learn from this 221-page (plus appendixes) peek inside the kimono? Not much. Not much at all.
Blackstone reports that currently managed almost $80 billion. The firm reports that its 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.
We also learn that 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. But after that period, the fee drops to 0.75%. And the firm gets 20% of the gains of its funds but only as long as the limited partners in each fund are getting a minimum return of 7% to 9%. In other words, if a fund has problems, Blackstone’s 20% disappears before its limited partners suffer any losses. The funds also have a clawback provision requiring Blackstone to pay back prior fees if losses down the road breach the minimum return rates.
And while Blackstone also get the notorious merger advice and monitoring fees from companies its funds buy, the firm has to reduce the management fees its takes directly from its funds by 50% to 100% of those fees received from portfolio companies. Still, last year Blackstone earned $1.1 billion in management and advisory fees plus about $2 billion in investment gains after subtracting limited partners’ gains. Specific info about just how much went to Blackstone execs in whole or in part wasn’t disclosed. The executive comp section was blank awaiting a further amendment of the S-1 filing.
It’s also important to remember what the deal isn’t amidst all the hype. As I explained back in February when Blackstone competitor Fortress Investment Group (Symbol: FIG) went public, buying shares of Blackstone isn’t the same as investing in a private equity fund or a hedge fund. Blackstone is an asset manager, just like the many already-public asset managers including BlackRock (BLK), which started life as an arm of Blackstone and is now a $1.1 trillion colossus worth $18 billion in the stock market. Papa Blackstone will likely be worth at least twice that much. BlackRock, mainly a purveyor of less exciting bond and stock funds, earned $323 million last year versus $2.3 billion for Blackstone.
An interesting aside for those keeping score at home — it appears that Fortress plays the private equity game better than Blackstone. It reported average annual return after fees of 40% since 1999 on its funds versus just 21% for Blackstone since 1997. Now the investment periods for the disclosed returns don’t exactly match up but bragging rights obviously go to Wesley Eden’s shop over Master Schwarzman’s. And in a mobius strip-like twist, several of the principals of Fortress left BlackRock back in the mid-90s to form their current firm. Small world, huh?