Taking Private Equity Public: The Blackstone Group

Abstract

On the eve of the Blackstone Group's much anticipated initial public offering (IPO), a Wall Street portfolio manager contemplates his commitment to purchase 20,000 units at $31.00 each. As one of the largest IPOs in recent history and the first major PE fund to go public in the United States, the offering had stirred up significant media and congressional interest, some of which was potentially damaging for the PE industry. Even taking the uncertainty of the tax law into consideration, the manager thought the market would respond positively to Blackstone's newly traded units. But there were still risks to consider. Excerpt UVA-C-2327 Rev. Sept. 14, 2017 Taking Private Equity Public: The Blackstone Group In the summer of 2007, Jillian Smith, portfolio manager of Cougar Investments, marveled at the tremendous success that the private equity (PE) industry had been enjoying. The importance of debt financing in executing PE transactions, the prevalence of loose lending standards, and the low interest rates in 2007 resulted in a staggering $ 686 billion invested globally in PE. The public equity markets were also booming, with the Standard & Poor's 500 Index (S&P 500) up 22% for the previous 12 months. The mortgage market had begun to falter, however, as borrowers defaulted at higher rates. It was unclear whether this instability would spread to a wider set of lending activities and ultimately impact the equity markets. Nonetheless, Smith, like many Wall Street portfolio managers, was eager to own a piece of the PE industry's most prestigious and successful funds. On June 21, 2007, the eve of The Blackstone Group's much anticipated IPO, Smith contemplated her commitment to purchase 20,000 units at $ 31 each. As one of the largest IPOs in recent history and the first major PE firm to go public in the United States, the offering had stirred up significant media and congressional interest, some of which was potentially damaging for the PE industry. Smith had just read about two proposed bills that threatened to change the taxation of PE funds. One plan changed the tax treatment of publicly traded PE firms, and the other changed the taxation of carried interest, the percentage of a PE fund's profits paid to its management team. Even taking the uncertainty of the tax law into consideration, Smith believed the market would respond very positively to Blackstone's newly traded units. Her optimism stemmed from the 18% return earned by investors who bought Fortress Investment Group during its IPO a few months earlier. The PE Industry . . .