Private equity IPO hailed
Shares of Blackstone Group rose 13% in their first day of trading Friday, as investors rushed to latch onto the private equity boom that has swept corporate and financial America.
Given the fanfare surrounding the company, the event seemed more like the coronation of a new Wall Street monarch than the public debut of an up-and-coming company.
And the stock’s “pop” -- on a day when the broader market fell sharply -- was another sign of how buyout shops such as Blackstone are challenging old-school investment banks and brokerages for dominance in the financial industry.
“It shows that the makeup of the big financial institutions that run Wall Street is fundamentally changing,” said Ben Phillips of Putnam Lovell NBF Securities Inc.
Private equity firms buy and restructure companies in hopes of selling them at far higher prices within a few years. Along with their close cousin hedge funds, these firms have reshaped Wall Street by playing ever bigger roles in corporate mergers, securities trading and global finance.
Blackstone raised $4.13 billion by selling 133.3 million shares in the biggest initial public stock offering since consumer finance company CIT Group went public in 2002.
The shares, which trade as BX on the New York Stock Exchange, were priced at $31 late Thursday. They rose as high as $38 on Friday before settling at $35.06.
Even for an industry that is accustomed to monstrous paychecks, the offering enriched Blackstone’s founders on a jaw-dropping scale. Stephen Schwarzman, with a 24% stake in the company, saw the value of his holdings rise by about $1 billion -- to $9 billion -- in Friday’s trading.
For all the hoopla, however, Blackstone will now face some of its toughest challenges.
The biggest will be maintaining the impressive earnings and investment returns that have enthralled shareholders.
Even private equity executives concede that the salutary market conditions that have fed their success can’t last. Private equity shops borrow heavily to goose their investment returns. But interest rates have climbed sharply this year.
Blackstone also will have to acclimate itself to the glare of shareholder scrutiny.
The cyclical nature of the business -- it’s easier to sell companies and book profits when the stock market is rising -- can result in jagged quarterly and annual earnings that could make its stock volatile.
“Its like the Hollywood hit business,” said Francis Gaskins, editor of research firm IPOdesktop.com in Marina del Rey. “You’re OK if you have a string of hits, but then if you stop, it’s over.”
Blackstone has drawn far more attention than Fortress Investment Group, the only other publicly held “alternative-asset” manager, which did an IPO in February. Its shares fell $1.63 on Friday to $24.25, after closing above $33 in April.
Schwarzman’s mammoth compensation and his high profile -- singer Rod Stewart performed at his opulent 60th birthday bash this year -- has helped Blackstone hug the spotlight.
Perhaps sensitive to the firm’s notoriety, Blackstone executives did not ring the opening bell at the NYSE on Friday morning, as is customary for a big public offering. A Blackstone spokesman could not be reached for comment.
Buyout titan Kohlberg Kravis Roberts & Co. is reportedly considering its own IPO later this year, but one hurdle to other firms may be an effort in Congress to boost private equity taxes.
Two senators have proposed taxing the firms as corporations rather than as partnerships, which could bump their tax rates to about 35% from 15%.
Other firms contemplating IPOs may rush to do so under a Republican administration, which would be less inclined to hike the industry’s taxes, experts say.
“The public attention and the attention Congress has given to Blackstone has turned it into a symbol for what’s to come, and that will be a plethora of filings from hedge funds and private equity managers,” predicted Steve Howard, head of the private equity practice at law firm Thacher Proffitt.
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