The Blackstone Group (Blackstone) is a private equity firm founded in 1985 by two former employees of Lehman Brothers. In May 2007 the firm had $88.4 billion under management and had grown 41% annually since 2001.
The firm operated in several business groups but distinguished itself from other firms by extensive collaboration across divisions. It was divided into Corporate Private Equity, Real Estate Funds, Marketable Alternative Asset Management, Corporate Debt Funds, and Advisory Services.
In 2007 Blackstone started to evaluate the option of taking the firm public. Reasons why the firm should do an IPO, outlined by the firm’s internal project group, included: •
Permanent pool of inexpensive capital and a wider group of investors •
Long-term orientation in compensation package to employees •
Shares could be used as currency in transactions
The firm would become more reputable
Partners could monetize their ownership in the firm
The firm also identified several drawbacks with going public, including: •
Quarterly reporting requirements leading to higher costs and more insights in the firm from the market •
Risk that the market is unable to tolerate the variation of earnings in the firm due to long-term focused investments •
Changing the firm’s structure and compensation system from a partnership to a corporation includes several challenges
In 2007 the firm announced that it will go public and I will in the following five sections elaborate on some of the challenges the firm has to overcome and other implications following the IPO.
What are the built-in tensions with a public private equity firm? How does Black Stone’s structure attempt to reconcile them?
Openness vs. private governance
A challenge for private equity firm when going public is that it looses 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.
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). Fortress Investment Group, that went public during 2006, has used this structure and considering the share price of that firm, it seemed like the investors appreciated the structure. MLP is a limited liability company with units of the firm that can be traded on the stock market. 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 (share holders) 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 when being a private company. There is however a risk that the firm should be aware of, the investors can use other form of pressure (media, etc.) to influence the managing partners.
Short-term vs. Long-term perspective
One of the advantages of being a private firm is that the firm only has to disclose limited information about its operations. Blackstone operates its investment on a long-term basis why the firm has a lot of variability in its earnings. As an example, a fund usually has a return that can be visualized in a “J-curve”, meaning that the fund is basically loosing 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.
Blackstone is basically using two ways to approach the problem. First, they are aligning the compensation to its employees so it serves the interest of both the limited partners (long-term) and the stock market (short-term). This is further...
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