Steve Stirling Is Having too Much Fun
Understanding Botswana

Private Equity! No! Public Equity!

Blackstone has built itself on the belief that the costs--transactional, organizational, and motivational--of engagement with the public markets outweigh the benefits to investors. Yet now Blackstone is going public--thus implicitly stating that in this case the benefits to insiders outweigh the costs. The natural question for outsiders to ask is the First Question of Wall Street: if it is a good idea for you to sell to me, why is it a good idea for me to buy from you? / Comment & analysis / Analysis - What may underlie Blackstone’s new-found faith in public markets: Francesco Guerrera and James Politi: [U]nderneath the dealmaking machinations and behind-the-scenes lobbying lies an industry rocked by the revelation that one of its own is planning to ditch the cover of private ownership and list on the stock market. Last Friday’s news that Blackstone was in the final stages of preparing a New York listing that could value it at anything between $20bn and $60bn sent buy-out executives, investors and corporate leaders scurrying for explanations.

Is the planned listing an opportunistic move by the astute asset traders who own Blackstone – in particular Steve Schwarzman and Pete Peterson, its founders – to cash in their chips by tapping stock market investors at the top of an unprecedented private equity boom? Or is it another inevitable step in the industry’s coming of age, opening it up to new sources of capital and ushering in a more stable era in which its fortunes will no longer rely on flighty debt markets and the vagaries of the economic cycle?

Although Blackstone has remained characteristically tight-lipped about the initial public offering, the most likely answer is that a flotation would give it access to capital that, unlike the funds raised from private investors and pension funds, does not need to be returned to the source. The many attractions of “permanent capital” figured highly on the list of reasons given by Blackstone’s precursor in the public market arena – Fortress Investment Group, the hedge fund and private equity manager that floated last month.

For a seasoned investor such as Mohamed El-Erian, who manages Harvard University’s $29bn endowment, such a move would put buy-out groups on a firmer footing, ensuring that they have an adequate financial buffer when financial conditions are tough. “It is an evolutionary process, part of a restructuring of the industry,” he says. “Attracting permanent capital will give private equity groups access to a broader set of investors in times of financial distress.”

In theory, the ability to call on stock investors at will – as opposed to the three- or four-yearly fundraisings typical of private markets – ought to smooth out the boom-and-bust cycles private equity has been going through ever since its inception. A listing of some buy-out groups could also alleviate a much feared side-effect of the current deal bonanza: the risk of a stock market collapse caused by private equity firms’ need to sell their investments at the same time in a rush to return funds to investors.

Permanent capital and a vast crystallisation of wealth for the firm’s top brass may, however, come at the expense of Blackstone’s business model. Public company executives are quick to point out that a listing would undermine a cornerstone of buy-out funds’ arguments for taking over listed groups: the claim that private ownership helps companies by shielding them from the regulatory burden of the stock market and the short-term demands of impatient investors. “There is a huge irony here,” says an executive at a company that has received approaches from private equity groups. “If they dislike the markets so much, why go and raise funds there?”

In December, Mr Schwarzman himself told the Financial Times that the web of regulation, disclosure and quarterly earnings requirements was “a brake on American public companies” that was leading to a “going-out-of- business sale” for US corporations. In the same video interview, he also pointed out that any would-be listed buy-out fund faced the potentially insurmountable task of weaning stock market investors off their quarterly earnings fix in exchange for higher returns – sometimes. “The gains are periodic,” he said. “In some cases, firms like ourselves [make returns of] 30 per cent a year. Some years you get a lot of it, some years you get a little of it”...