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The Blackstone IPO: Why Did Goldman Get The Greenlight?

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While the rest of us were reading about Economic Net Income and Steve Schwarzman’s big IPO payday, Lauren Silva at BreakingViews was paying attention to something far more important: which banks scored underwriter rolls in the deal. And she noticed that a big name that had been noticeably left out of the deal had found its way on to the left hand side of the front cover. That’s right, Goldman is now an underwriter for the Blackstone Group IPO.
A bit of background after the jump. And, of course, the answer to the question of how Goldman got the role.

It was a Friday afternoon in the middle of March when the public first learned that Blackstone was going public from CNBC’s David Faber. Faber said that Goldman Sachs was putting together the prospectus. Rumors on Wall Street and on DealBreaker, as well as reports by CNBC’s Charlie Gasparino, had previously mentioned the possibility of a public offering for Blackstone—but Faber’s report was the first to confirm that an investment bank was actively working on the deal.
The problem was that Faber had the wrong bank. Goldman was not working on the deal, as DealBreaker’s Bess Levin first reported on the day the story broke. Gasparino confirmed this in his report on Monday. But this didn’t end Goldman’s involvement with this story. It amplified it. The absence of such a prominent investment bank from one of the most talked about deals on Wall Street raised eyebrows and fired up everyone’s speculation and rumor machinery. Why was Goldman left off the deal?
The reasons given were plentiful and plausible. Blackstone didn’t want to give Goldman Sachs, which has its own private equity business that competes with Blackstone, a peak inside its inner workings. Schwarzman has a grudge against Goldman. Goldman had just closed a $20 billion buyout fund of its own, surpassing a fund that Blackstone was raising at the time. Schwarzman was still peeved that he was overlooked by Goldman’s Hank Paulson for the Treasury Secretary job. Blackstone was working on a competing IPO for KKR. Or maybe it was Apollo. Schwarzman wouldn’t invite Henry Kravis to his birthday party because Kravis had never invited Schwarzman to anything. (We’re not sure what that last one had to do with anything.)
It seemed overdetermined that Goldman wasn’t going to get a piece of the deal. And Goldman Sachs sounded like they were totally cool with that. “We happen to have as a firm a terrific relationship with Blackstone,” Goldman topper Lloyd Blankfein said. “It’s impossible for us to be in every piece of business.”
So how did Goldman get it’s nose under the tent? As you probably already guessed, no-one knows for sure but the theories are proliferating.
Let’s start with the first out of the box, from BreakingNews’ Silva. “By hiring virtually every investment bank, it keeps people from criticizing its planned $33 billion valuation. This is particularly important for, say, Goldman, whose own stock trades on lower valuation multiples than those being suggested for Blackstone,” Silva writes. Her theory is so dirty, conspiratorial and “Wall Street Versus America” that you almost want it to be true.
DealBook has a predictably vague, boring and unsatisfying answer. “For one thing, with 17 firms involved, it would be difficult not to include a major underwriter such as Goldman,” DealBook writes. That sure explains everything.
Gasparino (of the NBC with the extra C) dug around through his phonebook and came back with the theory of The Look Mom, No Conflicts Theory of Goldman. There was a time—now hard to even imagine—when many investment banks avoided competing directly with clients for fear of losing other business. Goldman was the exception to this rule, competing against clients with one hand and stroking their egos with the other. Gasparino points to this anonymous quote from the big profile of Blankfein in Sunday’s New York Times:

“There’s an expression: It’s easier to ask for forgiveness than permission,” says a senior private equity executive who requested anonymity for fear of alienating Goldman. “Rather than ask, ‘Can I compete with you?’ they say, ’Sorry, but we’ll help you get another deal.’ And they get away with it because it’s hard not to be in business with Goldman Sachs.”

According to Gasparino, a lot of people think that “senior private equity executive” is Schwarzman, and it may give some indication about how Goldman got in the deal—because you have to let them in on your deal. It’s some magical rule of the universe of Wall Street. (Which, actually, is kind of what DealBook said.)
DealBreaker’s sources suggest something completely different was at work. Blackstone was apparently concerned about how to give equity to its executives going into the IPO. There was a danger that people who felt short-changed might leave. As is always the case when a big pay day lumbers down Wall Street, the forces of greed and envy began to tear through Blackstone after the IPO was announced. To quell a possible rebellion and prevent ego bruising, Blackstone executives began consulting with people at Goldman, which had faced similar challenges when it had gone public. And those conversations, we’re told, are what led to Goldman getting credit as underwriters on the deal.