The Blackstone IPO : Part 2 of 3- The New Private Equity Philosophy

This morning, I read through the Wall Street Journal's Monday article concerning the potential Blackstone IPO. Most of the piece seemed to dwell on how many other parties will be upset with Blackstone or Schwarzman over the IPO. There were comments about how investors would react to the large payouts to management and partners. Plus a lot of ink about existing public investment banks getting upset at the rather more brazen competition from the newly-public private equity giant.

However, all that notwithstanding, I am interested in the second of my two topics on this IPO- the new meaning of private equity's philosophy, in light of Blackstone's IPO.

Everyone reading this blog is likely to be very conversant with the world of private equity, and Blackstone, as well as have read several stories by now in various business publications, if not seen endless stories about it on CNBC and CNN. So I won't restate what it is that Blackstone and its ilk do to create the value that they do.

What mystifies me, to be blunt, is how the Blackstone management team will "create" value when their central raison d'etre is gone. When they have to file quarterly reports, be valued as a conglomeration of wildly different businesses, and become hostage to public investors, and their expectations, how will they maintain their 'patient money' credibility and capability?

What, precisely, will the new Blackstone offer managements to buy them, since they can't be 'taking them private' anymore? And what does Blackstone hope to do for a prospective acquisition, since it is now just another public bidder. Does it believe it possesses a superior turnaround staff? Because if the turnaround is in the hands of existing management, then what does Blackstone add to the firm's efforts?

After so many years of ostensibly creating value in a sheltered, patient manner, the firm is throwing all that away in one go. How, then, will it continue to create comparable value going forward? With its complicated mix of financial service and operating parts, how will it be properly seen and understood for value maximization? Won't Blackstone have to slowly, but surely, unravel itself, in order to "unlock" the values of each constituent element, just like the firms from which it has made its money by buying those parts?

If it cannot, or does not, continue to create value through all of these efforts, then is not the investing public buying the prior value creation model, but holding the current/future model? Is this not a classic case of paying for prior accomplishments, while the very environment which allowed those achievements, those returns, is eradicated?

Given that other private equity firms will continue to exist, perhaps Blackstone will have a diminishing share of that activity. Perhaps this is Schwarzman's way of assuring that he and his partners are not the last ones holding the bag of overly-competitive private equity competitors, while the value of the model decreases with time.

If the Blackstone IPO is, in reality, the first significant removal of capacity from the private equity sector, then Schwarzman will probably win again, by attaining a high value for his business, before the true state of the sector becomes generally known.