BLACKSTONE IPO

Group Assignment - 2

Group No. – 10

Ran Vijay (M126-16) – 8447771860

Digraj Kumar Mahanta (M099-16) - 9022760046
Group - 8 Private Equity & Venture Capital Group Assignment

Case - Blackstone’s IPO

1. What are the built-in tensions with a public PE firm? How does Blackstone’s

structure attempt to reconcile them?

Answer 1 - Following broad built-in tensions are associated with a public PE firm:

1. Openness vs. private governance (Quarterly reporting requirements and their

associated cost and scrutiny): A challenge for private equity firm when going public

is that it loses the benefits associated with being private. In the case of Blackstone,

the firm’s management mainly described the need for maintaining the current

governance, where the partners manage the firm, in order to ensure the firm operates

in the interest of its limited partners.

2. Perception of conflicts of interest because of the structure creating different classes of

investors/owners

3. The market’s orientation towards the short term gain instead of long term variability

protection and investment in illiquid assets that are hard to value. The fund usually has

a return that can be visualized in a “J-curve”, meaning that the fund is basically losing

money in the beginning due to management fees but catches up in the long run. The

stock market is known to be short-term focused and may interpret the fluctuation as

negative news and therefore causing a fluctuation in the stock price or an

undervaluation

4. Difficulties associated with changing the Firm’s structure and compensation system

5. Form a partnership to a corporation and minimizing attendant tax consequences

Group - 8 Private Equity & Venture Capital Group Assignment

Blackstone’s attempt to reconcile the issues in the public PE firm

1. To handle the tension between maintaining governance and comply with the rules for

listed companies the firm chose to adopt a Master Limited Partnership (MLP) following

the successful adoption of Fortress Investment Group that went public during 2006.

MLP is a limited liability company with units of the firm that can be traded on the stock

market.

2. The structure allows the firm to retain the limited partnership form of governance and

hence, allow the management team to continue manage the firm. The unit holders

(shareholders) only have limited voting rights and cannot influence the management

team in the firm. By choosing this structure the firm can maintain the decision power

in the same way as a private company.

3. Blackstone is also aligning the compensation to its employees so it serves the interest

of both the limited partners (long-term) and the stock market (short-term). Second, they

are informing the potential investors through a prospect that holding a Blackstone unit

(share) is different from other shares in the market.

4. To further smooth out potential fluctuations in the share price the firm guarantees a

dividend during the first years after listing.

5. The fact that the stock market tends to be short-term focused further shows the

importance of having the MLP structure. To maintain the long-term focus on

investments the firm needs to separate the governance of the firm from the

shareholders and the limited voting rights will ensure this.

Group - 8 Private Equity & Venture Capital Group Assignment

2. If you were an LP in Blackstone. How would you view the structure Blackstone

has put in place to go public?

Answer 2 - Areas of Concern as an LP due to the change in the structure of Blackstone are

as follows:

1. The firm does not want to have an underperforming or fluctuating stock in the long run

resulting in the limited partners long-term interest may be down prioritized.

2. The risk of losing competent people due to the changed compensation package

providing mobility and liquidity.

3. The fact that the firm is a public firm is probably more prestigious for the managers

than being private. So, the focus may gradually turn towards the interest of the

shareholders. As a part of their compensation comes in shares. Depending on how the

stock market will turn out to react to news from the firm it might be so that the managers

realize that they can earn more money by being short-term focused and that would not

be aligned with LP’s interests.

4. The firm may try too much to stabilize the share price and fulfil the interest of the

shareholders by focusing on short-term profits.

Reasons for comfort:

As a limited partner in Blackstone I would consider the structure as chosen to ensure my

interests.

Given the fact that the firm chose to go public for the opportunities like inexpensive

sources of capital, succession issue and extension of brand, it seems to the best way of doing it

because of the following

reasons:
Group - 8 Private Equity & Venture Capital Group Assignment

1. Many of the limited partners in a private equity fund are pensions funds or similar and

do not mind to lock their money over a longer time period and, by doing so, seek the

long-term profit that the private equity firm can offer.

2. The structure allows the governing rights of the firm to remain with the partners and

therefore the firm avoids that the short-term oriented market gets direct influence over

decisions.

3. The suggested compensation package should align the interest of the managers in the

firm with the limited partners, or at least maintain it similar to before.

3. Would you rather be a unitholder in Blackstone or an LP?

Answer 3 - Blackstone has the competence and procedures to operate in the interest of the

limited partner in a long-term focused approach. Considering the proposed structure,

Blackstone intends to leave less information to the market than a normal firm which may

cause the risk of under or overvaluation of the stock. The stock price may fluctuate due to

information, lack of information, and speculation. Therefore, the market may act inefficient

and in worst case it can destroy the value of the stock.

In contrast, the limited partner could avoid the fluctuations in share price and if the firm

manage to keep its focus and strategy, the LP can expect a good return. So, considering

all the facts, a limited partner in Blackstone would be a better choice though it is good to

follow the development of the firm closely and take appropriate decisions based on the

changing scenario.
Group - 8 Private Equity & Venture Capital Group Assignment

4. As a potential employee, how you evaluate the Blackstone compensation package

against a commensurate offer from a similar large-scale PE firm that was not

public?

Answer 4 - The firm decided on multi-phase approach for compensation that includes a

combination of management fee, the carry interest, and a number of units (shares).

The suggested compensation package will take care of the following issues:

I. The employees should not be worse off than before

II. Their interests should be aligned with both the limited partners and the shareholders

III. Partners and managers ownership should not be too monetized in order to retain

competence in the firm

If considered for becoming an employee before the IPO, the decision depends on the

shares that would be provided and whether that can outweigh the risk.

If considered for starting to work for Blackstone after the IPO & for a non-public PE firm,

the later would be a better choice as there are several drawbacks with a part of the salary

in shares. First, a part of the salary will be exposed to fluctuations in the stock market and

these fluctuations may not always be justified.