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Would Blackstone Buy Blackstone? And Other Questions About the IPO

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When Is the IPO?Blackstone Day will go down sometime during the week of June 25th, its underwrites said today. The exact date hasn’t yet been set. The stock will trade under the stock ticker symbol BX, in a bold repositioning of a brand logo already popular among proud Bronx hip-hoppers.
How Do I Figure Out What Blackstone Is Worth? The truth is that you probably cannot. Blackstone’s recent filings with securities regulators has Wall Street analysts and business journalists scratching their heads trying to figure out what the company might be worth. At one point Blackstone planned to use a complex accounting method to assess the ‘fair-value’ of its investment by listing them on the books at their expected value discounted for the fact that it they might not be sold for several years. This was abandoned after it raised eyebrows from potential investors, journalists (who referred to it as “Enron accounting”) and lawmakers who saw an opportunity to tax the firm.
In its recent filings Blackstone makes heavy use of a rather, uhm, unique measure of its performance—something called “economic net income.” Since almost no-one else uses this measure, it is very hard to compare Blackstone to any other public company. Which may be the point of using it.
Why Should I Get Into Private Equity If They Are Getting Out? This common objection to the IPO is probably misguided. As far as we can tell, only one bigshot at Blackstone is really “getting out”—82 year old Blackstone co-founder Pete Peterson. He is expected to walk away with $1.88 in cash, and will hold just 4% of the equity of the company after the IPO. But Peterson was probably getting out—one way or another—sometime soon anyway. The rest of Blackstone’s top executives are staying in. Blackstone’s other co-founder, sixty-year old Steve Schwarzman will own 23% of the company after the IPO. Other executives will hold significant stakes as well. In all, Blackstone executives will own 70% of the company after the IPO. And the principals will be required to hold the bulk of their shares for as long as eight years follow the IPO.
So Blackstone Is Going Public But Will Still Be Owned By Blackstone? That’s right. Blackstone is selling only 10 percent of its equity to the public, and another 10 percent of non-voting equity to the Chinese government. Almost of all of Blackstone stays with Blackstone’s partners.
Isn’t being a minority partner with limited voting rights risky? Yes it is. You’ll basically be at the mercy of the managers of the firm who are also the owner. There are minimal legal protections for minority limited partners but the key word in that phrase is minimal. Buying into Blackstone means putting your trust in Blackstone. You either run with them or you don’t. But you won’t be calling the shots.
Would Blackstone Buy Blackstone? It’s hard to say. On the one hand, the answer is Definitely No. Blackstone would never buy a company if it understood as little about how it made money and how it made business decisions as many of those who buy into the IPO or buy the stock afterwards will know. Blackstone specializes in buying companies that it knows a lot about. It doesn’t sign checks while it is still scratching its head.
The other hand is also a No. Blackstone’s private equity business likes to control the companies it buys. It does more than private equity, of course. But we’re talking about the core business that made Blackstone Blackstone. And the PE guys didn’t get rich buying small parts of companies that would remain under tight control of the managers and current owners.
There’s a third hand, however, and that hand is Signs Point To Yes. The Blackstone filings are confusing and the way they account for their performance might be described as “rabbits in hats” or “Schroedinger's cat” or “a blackbox you can’t look into.” This means that Blackstone exists in an area made dark by calculational chaos and public ignorance. But this is a territory that Blackstone has specialized in—being better at sorting out calculational chaos than nearly everyone else. We all see through a glass darkly, but Blackstone partners have made bundles of money because they are slightly better at seeing through that glass. Blackstone would buy Blackstone if they believed they understood it better than anyone else.
And, in a way, Blackstone is buying Blackstone. They are signing on to hold their stakes in the company for years after the IPO, and will own the overwhelming majority of the equity. So they do think they enough about the company to own it. What they are asking investors to do is trust that they know their own value. And since investors will only buy Blackstone shares if they think the company is good at uncovering hidden values anyway, this request might not be as strange as it seems.