The Blackstone IPO : Taking Advantage of the Mediocre

Schwarzman must have been planning the Blackstone IPO for some months. Given how quickly it proceeded after the leak a few weeks ago, it was clearly in the works for some time.

Like my recent post about being 'wrong' now, and 'right' later, when the broad, mediocre middle rushes after you, Blackstone/Schwarzman are ahead of the average investor in realizing the end of private equity as we knew it. Or, if not the end, certainly a peak price for private equity firms.

Schwarzman, Blackstone's CEO, is a very bright guy, and no doubt understands Schumpeterian dynamics all too well. After only 22 years, Schwarzman is not so emotionally attached to Blackstone that he is trying to restructure it as its major market sector undergoes radical change. Instead, he's taking the big payday and acknowledging market forces greater than he can control.

Initially, in my three prior posts, here, here and here, I mistakenly believed that the Blackstone IPO would be for common shares of a listed company on an exchange such as the NYSE. Instead, as I read last weekend in the Wall Street Journal, Blackstone is becoming a master-limited partnership, which is, in a sense, very much like the structure of a hedge fund. Limited partners have no say in the operation of the firm, and, after fees and expenses, share in the income of the organization. Apparently, the Blackstone partnership shares would be tradeable.

Thus, my earlier comments regarding Blackstone's inability to continue to do private equity transactions were in error. However, I believe that those transactions will continue to be less lucrative, as the prices rise.

What I find amazing, however, is that investors are lining up to buy shares of an entity in which they can't even measure risk levels. Essentially, they are buying income 'participation shares,' much like I advocated last year in this post regarding corporate governance and takeovers. But, rather than retaining interest in a previously-public firm, they are buying the equivalent of a blind pool.

In a very real sense, Schwarzman has created the best of both worlds- retaining total control and privacy of operations, while establishing a value for the firm, and cashing out while doing it.

Honestly, I have even more respect for him now than I did before. Not that I would be on the other end of an equity transaction from him. And, correspondingly, I have less respect for the investors who buy the Blackstone IPO shares.