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A private-equity giant prepares to go public

STEPHEN SCHWARZMAN, who has presided over many eye-catching takeovers, recently
cemented his reputation as the new king of Wall Street with a lavish 60th birthday
party. Among the numerous celebrities at the event was Rod Stewart. The big-haired
songster, known for classics such as “Maggie May” and “Da Ya Think I'm Sexy?”,
wooed the ladies with his gravelly voice. But for the moneybags present, his
pulling power was nothing compared with that of Blackstone, the hugely powerful
firm that Mr Schwarzman co-founded. The private-equity giant may be about to get
hotter still. Reports suggest it will soon be floated on the stockmarket. Such a
move would turn many a head in the industry, which has grown into a dominant force
in deal-making.

Blackstone is believed to be in the advanced stages of planning an initial public


offering (IPO) of a minority stake, perhaps 10%. Though it would not be the first
“bulge-bracket” buy-out shop to embrace the market—Kohlberg Kravis Roberts (KKR)
has listed a fund in Europe, for instance—it would be the first to float the main
management company. Predicting its value is not easy given Blackstone's broad
range of businesses, encompassing hedge funds, property and advisory arms, as well
as leveraged buy-outs of public companies. Appraisals range from $20 billion to
double that. Blackstone's managers, perhaps inspired by Mr Stewart's “I Don't Want
To Talk About It”, are keeping mum.

The move is steeped in irony. Mr Schwarzman has derided public ownership, calling
stockmarkets “overrated”, and bashed the Sarbanes-Oxley act, which clamps
corporate-governance manacles on listed firms. One blogger described his
conversion as “the most unlikely...since Saul of Tarsus fell off his horse en
route to Damascus”. But his supporters see no hypocrisy at all: Blackstone's
bosses know the value of public markets only too well, since they need them to buy
back the companies in its portfolio when they want to cash in their gains.

Nor is the news particularly surprising. The successful IPO last month by
Fortress, a hedge fund and private-equity firm, showed that there is plenty of
demand for “alternative” assets among small investors whose access to private
markets is restricted. Long before that, big private-equity groups such as Texas
Pacific and Carlyle were mulling similar moves. They will watch Blackstone's
progress closely, just as Wall Street's investment-banking partnerships studied
Bear Stearns when it went public in 1985.

But Blackstone's model is more likely to be Goldman Sachs, which has thrived, and
retained much of its partnership mystique, since floating its shares in 1999. It
may hope to use shares as a currency with which to reward its 750 employees, as
Goldman has so generously done. A listing may also allow a new generation of
managers to come forward, as the old guard loosens its grip. Blackstone is stuffed
with over-achieving 20- and 30-somethings, such as Jonathan Gray, who masterminded
the recent $39 billion takeover of Equity Office Properties.

Few doubt that the clearest winners would be Blackstone's owners and the tight
group of senior managers around them. A listing would allow them to extract and
diversify some of the value tied up in the company. Mr Schwarzman could free up
part of his stake, thought to be 40%, without losing control. He may, however,
lose the respect of some of Blackstone's “limited partners”, the institutions and
wealthy individuals who invest in buy-out funds, if the move is construed as a
brazen attempt to cash out at the top of the market. He and other private-equity
bosses have acknowledged that the good times cannot last forever. Blackstone's
returns last year and the year before topped 100%, unsustainable in any industry.
Indeed, the limited partners would have few reasons to celebrate an IPO. They
would suffer if Blackstone came under pressure from the market to support returns
by raising its already plump fees. Some of them might decide to stop investing in
its funds and buy its stock instead, retaining exposure without having to hand
over a 1-1.5% management fee and 20% of investment gains.

Blackstone itself might discover drawbacks too. It would have to disclose more
information—lawyers argue over how much—and it would be shackled by what Mr
Schwarzman has called the “tyranny of quarterly earnings”. On the other hand,
greater transparency might reduce the pressure from critics of private equity, who
caricature the industry as a destructive force, stripping assets in the shadows.

Josh Lerner of Harvard Business School points to two other potential problems, one
caused by too much liquidity, the other by too little. A public Blackstone would
have to learn to live with fickle small investors, who, unlike the current crop,
could sell at the first sign of trouble. And the stockmarket may fail to
appreciate the lumpiness of the firm's earnings. Private-equity gains are realised
at irregular intervals, when holdings are sold. This is one reason why KKR's
listed fund trades below its net asset value.

So, as admired as Blackstone is, a public offering would bring new risks. But for
those who have built the firm up to its giddy heights, the rewards must seem more
palpable. If stockmarkets keep their composure in the run-up to the flotation, and
credit markets remain benign, Mr Schwarzman's next birthday bash may—Rod willing—
be treated to a storming version of “Some Guys Have All The Luck”.