Blackstone IPO: Not for the Small

NEW YORK (AP) – Small investors looking to buy a stake in private-equity powerhouse Blackstone Group might want to look elsewhere for the time being — the first pass in its much-hyped initial public offering is likely to go exclusively to Wall Street's elite.

Top executives at the nation's second-largest buyout shop are set to traverse the globe in the coming days to sell the IPO to investment firms, pension funds, and other institutional investors. The pitch — coming directly from founder Stephen Schwarzman — is to persuade money managers to peddle the offering to top clients looking to cash in on the booming private equity industry.

Retail investors are all but certain to be boxed out of the much-hyped IPO, which is set for the week of June 25 — but given the circumstances, some think it might be to their advantage.

“These private equity firms are all the rage right now, and that has everyone all excited about it,” said Peter Morici, a professor at the University of Maryland's Robert H. Smith School of Business. “But, regular investors aren't going to get a good deal out of this. Any investor in Blackstone is facing a whole series of obstacles.”

Whoever does end up with a stake in Blackstone will actually be left with little voting power in a company that already said it won't turn a profit for years. And while private equity deals continue to drive acquisition activity to record highs, the firm has come under scrutiny for some of its proposed accounting treatments for those acquisitions.

Nonetheless, those following Blackstone's path to the public markets are near-unanimous that this IPO will garner the same kind of attention afforded to companies like Google Inc. and Goldman Sachs Group Inc.

The biggest difference in this case is that Blackstone — while reaping big returns through multibillion dollar takeover deals — might not give stakeholders the same kind of success.

The firm is only selling the public 12.3 percent of its management division, which gives investors no direct connection to the hundreds of companies and real estate properties it manages. The firm's management will control about 70 percent, and investors will be left with no say in Blackstone's portfolio or strategy.

Blackstone, founded in 1985 with a $400,000 initial investment, has also left investors flummoxed about how to gauge its earnings potential. In a regulatory filing issued Monday, Blackstone said it expects significant net losses for years to come in order to cover executive compensation, and to gradually write down the cost of intangible assets.

The firm has also said its management plans to use “economic net income” — a rarely used term that refers to profit that excludes income taxes, noncash charges related to vesting of equity-based compensation, and amortization costs — as a measurement of its performance.

Blackstone warned potential investors that earnings will be “highly variable” as market conditions, and the state of buyouts, differ from year to year. There is also mounting concern — though the firm did not specifically mention it in its latest filing — that the possibility of rising interest rates will hurt business.

But, even with these caveats, there still is expected to be strong interest in the deal from those institutions and wealthy investors who have never before had access to the world of private equity. Traditionally, investors can only buy into a buyout shop if they put up a significant investment — in some cases more than $10 million.

“There hasn't been this much mania in an IPO in a long time,” said Peter Dunay, an investment strategist with New York-based Leeb Capital Management. “I think medium sized institutions and some well-connected individual investors, those that have money but not enough to directly invest in private equity, are going to be the most likely to buy.”

The IPO is expected to raise as much as $4.75 billion, and that will be added to the $3 billion secured in May from an investment from the Chinese government. Altogether, the entire company will be valued at just more than $32 billion.