Blackstone's Billions
March 23, 2007 — -- The fabulously wealthy will get even richer as Blackstone Group LP, one of the world's biggest private equity firms, plans to raise up to $4 billion in a highly anticipated initial public offering.
The New York-based firm, known for marquee takeovers such as February's $23 billion buyout of Equity Office Properties, is headed by former Lehman Brothers Holdings Inc. bankers Stephen Schwarzman and Peter Peterson. Schwarzman, 60, is one of the world's wealthiest people, with a fortune estimated at more than $3 billion.
The world of private equity, which works by taking public companies private with investors' and borrowed money, is one of secrecy because few of the firms are exchange listed. Schwarzman, though, doesn't hide from the spotlight.
Last month, for example, his multimillion-dollar birthday bash at an armory building in New York included hundreds of his closest friends and performances by Rod Stewart and Patti LaBelle. According to Fortune, which ranks the Blackstone chief as the 249th richest in the world, Schwarzman has a $30 million apartment in a building that once housed members of the Rockefeller and Vanderbilt families.
Until Blackstone filed to go public, its finances were cloaked in the fog of being a private company. But consider that Blackstone's funds own companies with 375,000 employees and $83 billion in annual sales. That would put Blackstone among the Top 15 in public U.S. companies.
"They've operated in their own stealth realm for so long that this really does take advantage of the flip side of the coin. They have an opportunity to benefit by being a public company," said Denise Valentine, senior analyst at business consultancy Celent LLC's securities and investment group. "This is going to be a big IPO, oversubscribed, and it will give Blackstone a bigger kingdom."
Blackstone, founded in 1985, said the initial public offering would allow it to tap new sources of capital for buyouts. In addition, it would help extend Blackstone's brand name and gives management a way to profit from the increased value of its stakes.
Details revealed in the firm's SEC filing show it has enjoyed an amazing 40 percent annual return on its various investments since 2001.
"We intend to continue to follow the management approach that has served us well as a private firm of focusing on making the right decisions about purchasing and selling the right assets at the right time and at the right price," the company said in the prospectus, which did not reveal the possible timing of an IPO or how many shares would be issued.
How did it do it? The Blackstone Group business is really four different businesses cobbled together under one roof.
The biggest part of the company's growth comes from its investments in hedge funds and other alternative investment vehicles. That part of the business has shown a better than 51 percent annual growth in the value of its investments.
It also invests in real estate, growing annually at 41 percent, corporate buyouts and restructuring -- annual compound growth of more than 31 percent. The firm also offers advisory services to other Wall Street players, with a growth rate of almost 23 percent.
According to Thursday's filing, Blackstone has 57 top partners and an additional 335 investment gurus on the payroll in New York and 10 offices around the world. Schwarzman and other top management don't plan to cede control of the company or the collection of companies it has acquired.
He plans to structure the company to leave control in the hands of its partners, not the new investors that will be buying shares when the stock debuts.
Some of Blackstone's worker bees -- the people who punch the clock there but are not considered senior directors -- will all get shares of the IPO. The senior directors also plan to start a charitable foundation with about $150 million in stock at the debut.
The filing has raised speculation that this might be the future for private equity firms, many confronted with a contraction in global stock markets that could stymie funding. Already, rival Fortress Investment Group LLC raised $643.3 million when it became the first private equity or hedge fund to go public.
Private equity funds, which used to be known in the industry as leveraged buyout firms, use cash raised from investors and from its own coffers to buy companies. The last few years have seen many of these firms band together to take over companies on a scale never imagined before, including Harrah's Entertainment Inc., energy company TXU Group Inc. and lawn-care company ServiceMaster Co.
The next step for private equity firms is to profit by taking these companies public again within five years after the initial deal.
Blackstone has a varied portfolio of companies that includes Madame Tussaud's waxwork museums in New York and London. It took German chemical company Celanese Corp. private, and then relisted it on the New York Stock Exchange in 2005.
The most recent coup for the firm was February's $23 billion acquisition of Equity Office Properties, which is the largest office landlord in the United States. The purchase was the largest private equity deal on record.
The buyout firms have prospered in an era of cheap money. The $144.7 billion of private-equity deals and management buyouts announced this year is ahead of 2006's record pace by 14 percent, according to data compiled by Bloomberg News.
Blackstone also said in the filing that there would be no severance arrangement, or golden parachute, given to Schwarzman as part of the plan to take the company public. He will receive no compensation other than a $350,000 per year salary.
Schwarzman is said to be the largest single shareholder of the company, but there are plenty of other major shareholders, some of which average Americans might have some part of. The filing shows pensions for public employees have contributed about 49 percent of the total funds that Blackstone manages. Corporate pensions, insurance companies and other individuals are also major investors in the private equity firm.
Schwarzman could not be reached for comment.
Morgan Stanley Inc., Citigroup Inc., Merrill Lynch & Co., Credit Suisse Group, Lehman Brothers and Deutsche Bank Securities are listed as underwriters for the offering.
The Associated Press contributed to this report.