The potential Blackstone IPO is attracting a lot of attention in the papers this morning. Over at the Wall Street Journal, Henry Sender reveals a novel economic dynamic that may end up pitting Blackstone's management and it's public shareholders against the large institutional investors in its funds. Part of what makes this so interesting is that it puts Blackstone's management on the same side of the public shareholders--both will be interested making sure the management company collects the biggest fees from its deals--at a time when private equity is increasingly under pressure to polish its public image.
Like many such firms, Blackstone's biggest investors include many of the same endowments and public pension funds that are demanding better corporate governance from publicly traded companies. These investors, known as limited partners, may not know in detail how much of Blackstone's fees go toward expenses and how much to the firm's bottom line.
More familiarity with the firm's practices could lead investors in Blackstone's funds to call for lower fees or a greater share of other sets of fees that Blackstone charges the companies it acquires or the individual funds it manages. Eventually, the demands of its pension-fund investors -- or their public overseers -- could lead to a spate of similar demands on other private-equity firms that could reduce those firms' profits.
"This will force limited partners to say 'We are paying you all too much,'" says a founder of another major private-equity firm.
Their demands could conflict with pressure from the potential public shareholders in Blackstone's core management partnership to extract as much money as it can from its buyout-fund investors and the companies it owns.
"If you're investing in the manager that's getting fees, those higher fees are in your interest," says Barry Barbash, a former Securities and Exchange Commission official who now heads the asset-management group at Willkie Farr & Gallagher, a law firm.
In addition, a public listing could alter Blackstone's standing on Wall Street. Traditional Wall Street firms have increasingly regarded Blackstone as a rival, given that some of them are aggressively building up their own private-equity arms. At the same time, Blackstone is treading on their turf by building up advisory and money-management businesses.
And over in the New York Times, DealBookers Andrew Ross Sorkin and Michael J. De La Merced explain that we shouldn't expect too close a peak at the way Blackstone operates from its IPO-related filings.
But because the public offering is for Blackstone’s management company, and not for direct stakes in companies it invests in, shareholders will get only a limited glimpse inside the Blackstone empire.
By way of example, take the recent public offering of Fortress Investment Group, a hedge fund based in New York whose market value on Friday was about $10.7 billion. Investors have been privy to the management fees that Fortress has taken and the firm’s investment record, but little else.
Talk of a Blackstone offering has often drawn comparisons with Goldman Sachs, the investment bank that many analysts describe as a giant public hedge fund. Though Goldman has been publicly held since 1999, it has been able to shroud the details of its trading and private equity businesses in secrecy.
Blackstone Plan Could Reshape Private Equity [Wall Street Journal]
Behind the Veil at Blackstone? Probably Another Veil [New York Times]