Blackstone Group shares rose 13 percent in their stock market debut Friday as investors scrambled for a piece of the sixth-richest initial public offering in U.S. history.
Chief Executive Stephen Schwarzman now controls a firm whose market value stands at about $40 billion. His personal wealth also skyrocketed, with a 24 percent stake in Blackstone’s management partnership worth around $8 billion, on top of the roughly $449 million he was expected to cash out in the IPO.
For those lucky enough to get in on the IPO — a difficult task since most shares were snapped up by big financial institutions and money managers — the stock barreled past its $31 initial price. The shares closed up $4.06, or 13.1 percent, to $35.06. About 113.1 million shares traded hands — almost the full offering of 133.3 million shares.
Exuberance about the booming private-equity industry overshadowed mounting criticism of the lavish lifestyles of top executives from politicians, labor unions and the media. The strength of Blackstone’s debut marks a coming of age for the once-secretive industry, as it joins Wall Street’s publicly traded top-tier investment houses.
“This is a new breed of publicly traded financial firm,” said Matthew Rhodes-Kropf, a professor of finance at Columbia Business School. “Once the market demonstrates its appetite for this type of investment, we’re going to see all the biggest and the best go public — even after the incredibly negative press it has generated.”
Blackstone’s flotation of its management partnership gives investors no real voting rights or direct connection to its $88 billion portfolio of companies and real-estate holdings. Among its investments are Universal Studios Orlando, Madame Tussauds wax museums and the real-estate titan Equity Office Properties Trust.
The firm reported a net profit on those holdings of $2.27 billion in 2006, largely through what is known as “carried interest.” In essence, this is the money that the management firm earns based on the gains from the investments of its funds, and is generally 20 percent off the top of the profits from those investments.
Despite the confusing structure of the company and uncertainty over just what was being bought, investors poured into the offering as 95 million shares exchanged hands by 1:30 p.m. EDT.
The offering is the biggest U.S. IPO for a private-equity firm and the biggest overall U.S. IPO in five years. It could open the floodgates for other alternative investment funds to go public, with names like KKR and The Carlyle Group seen as the most likely candidates.
Rival buyout shops will likely want to mimic Blackstone’s approach, which provided Schwarzman and co-founder Peter G. Peterson with a clean way to unwind their stakes. Unlike most IPOs where money raised boosts working capital to fuel expansion, the proceeds from Blackstone’s IPO went mostly to its top executives so they could cash out their holdings.
In fact, the New York-based firm warned in a regulatory filing that it would not turn a profit for years because of high compensation expenses for its employees.
Peterson, 80, took $1.88 billion in cash out of the IPO. He will retain a small stake in the company but is expected to retire next year. Schwarzman’s heir apparent, Hamilton James, is expected to cash out to the tune of $147.9 million from the IPO. He will still hold about 5 percent of the firm even after his payout.
Besides senior executives, other insiders that benefited included the Chinese government and insurance giant AIG. In May, China announced a $3 billion investment in Blackstone, which is likely worth something closer to $4 billion now.
AIG, a long-term investor in Blackstone, is also expected to have done very well in the IPO, though it was not immediately clear how big its stake was and to how much of a payout it was entitled.
But the success of the deal was not to say Blackstone’s entrance into public life went without a hitch. There were some concerns that Schwarzman would nix the IPO because of mounting scrutiny on Capitol Hill from lawmakers looking to block the offering.
The New York-based buyout shop acknowledged Thursday it could face much higher taxes as early as next year if it is taxed as a corporation instead of as a partnership, as a new bill in the U.S. House of Representatives proposes to do.
The proposal would effectively bring Blackstone’s tax rate to as much as 35 percent, from 15 percent now.
There was also some confusion about the initial price on Friday, with various data providers reporting first trades north of $40 a share, though those were not official opening quotes. But, once technical problems were fixed, Blackstone traded pretty much as expected, analysts said.
“There was heavy demand out there, especially because this came a week early, and it opened pretty much as expected,” said Ryan Larson, senior equity trader at Voyageur Asset Management, a subsidiary of RBC Dain Rauscher. “I think with the demand that’s out there that you’ll see this trade up, and maybe sell off a bit in a week or so to a more normal range.”