Still, the coverage of Blackstone's IPO plans, first broken by CNBC on Friday, March 16, demonstrates that despite all the attention lavished on private equity by the press these days, the media's understanding of the field remains limited. For instance, the cockeyed notion that Blackstone would go public mostly to secure "permanent capital" — and free itself from onerous fundraisings — seems to be lodging itself in the media's collective brain.
The Wall Street Journal was the first to put this idea out there. "By going public, Blackstone would gain a source of permanent capital, since money raised from an open market never has to be returned," the paper cooed on Saturday, March 17. "Blackstone then wouldn't need to depend on endless rounds of time-consuming fundraising."
The Financial Times, in a winding Comment & Analysis piece last Wednesday, seconded this logic. For Blackstone, "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."
Permanent capital? No more fundraising? Not very likely. If a post-IPO Blackstone morphed into a publicly traded investment pool — as these reports imply it would — it would likely fall under the cumbersome regulations of the Investment Advisers Act of 1940, which could, among other things, constrain Blackstone's ability to pay fees to, or receive fees from, affiliates. This would be problematic for a firm that makes some of its money by taking a cut of the profits made by its funds when they buy and sell companies. The permanent capital argument also seems to erroneously suggest that Blackstone is looking to sell to the public an interest in an investment fund (similar to Kohlberg Kravis Roberts & Co.'s offering in Amsterdam last year) rather than in its management company.
In its March 17 report, The New York Times, for one, correctly spelled out that this would be an IPO of Blackstone's management company only, noting that "investors would be buying into Blackstone's stream of management and performance fees." But the Times seemed confused on some other, more subtle, points. Its story worried, for instance, that a Blackstone IPO "could make it more difficult for the firm to retain top talent in the future because younger executives would not have the opportunity to own big stakes in the company." To which we ask: Ever hear of stock options? Indeed, the ability to offer recruits publicly traded stock was one reason cited for Goldman, Sachs & Co.'s decision to go public.
But by Wednesday, the Times, too — this time on, of all places, its editorial page — was suggesting that Blackstone wanted public funds for the sole purpose of dealmaking, which seemed to align the paper with the permanent capital camp. "By going public, the group is saying that it expects to need more money going forward than it is likely to be able to raise privately," its editorial opined. "That suggests that Blackstone is planning to do even bigger deals in the future — or that it foresees a credit crunch (or both)."
The Journal, meanwhile, seems to have smartened up about the Blackstone IPO since its original Saturday effort. A sophisticated piece Monday discussed how the offering could adversely affect the private equity business by shining some light on its fee practices and offered some compelling examples of how an IPO could be structured, including as a master limited partnership or as something similar to a real estate investment trust. As for the real impetus behind a potential Blackstone IPO, we suggest you turn to a piece in this issue by The Deal's own private equity maven, David Carey. As that story's headline puts its, "It's the valuation, stupid." —Yvette Kantrow and John Morris
