Blackstone debut signals change
Biggest IPO in years opens path for other equity firms and draws scrutiny from lawmakers as they seek new tax revenue
The initial public offering by Blackstone Group today could reshape the booming buyout industry, spurring other firms to register for IPOs while provoking a backlash that might boost the taxes of wealthy managers of "private equity" funds that buy or invest in companies.
That was the consensus of industry watchers yesterday as Blackstone priced its sale of 133 million shares, roughly 10 percent of the New York investment firm, at $31 a share, raising $4.13 billion in the largest American stock offering of the past five years.
The offering gave Blackstone, which begins trading on the New York Stock Exchange this morning, a market value of $33.48 billion.
"This is one of those epic IPOs that might create a sea change, like Netscape," said Josh Lerner , a Harvard Business School professor specializing in private equity, referring to the web browser company that kicked off the Internet revolution when it went public in 1995. "You get a sense that this is really going to change things for better or worse."
Private equity firms have generated tens of billions in returns in recent years. They raise large funds from limited partners, such as pension funds, foundations, and university endowments, and invest in companies of all kinds, taking controlling interests and often buying the companies outright. They later recoup their investments, frequently with outsized profits, by selling the companies or taking them public through IPOs. Until recently, however, the buyout firms themselves had not sold shares to the public.
The ferment over the Blackstone offering has the potential to touch Boston, where Blackstone is one of the largest commercial real estate owners and where a cluster of other buyout firms, including giants Bain Capital Partners and Thomas H. Lee Partners, is based. Partners at private equity firms were reassessing their future yesterday in light of the Blackstone move and reports that another buyout goliath, Kohlberg Kravis Roberts & Co. of New York, had hired a pair of leading investment banks to help with its own potential stock offering.
Scott Sperling , co president of Thomas H. Lee Partners, yesterday said the firm plans to retain its private structure for now. Principals at Bain Capital Partners declined to discuss their plans.
At the same time, the spotlight on Blackstone's IPO has increased pressure on Capitol Hill to end tax breaks for private equity financiers. Last week, legislation was introduced in the Senate to raise taxes on private equity firms that become public companies. And yesterday, US Representative Barney Frank , Democrat of Newton, said he would back a Senate proposal to tax the income earned by private equity fund managers at a higher rate.
"There's so much money involved that I don't believe the tax change would retard the [Blackstone] IPO," said Frank, noting that the Blackstone principals stand to reap billions from the offering. "And even if it did, there's no great social loss. This is a financial transaction."
Despite the heightened scrutiny by lawmakers and regulators, the partners at private equity firms have strong financial incentives to mount IPOs in the aftermath of the Blackstone offering.
"The public markets are hungry for these kinds of stocks, and it's a way for their senior partners to monetize their investments before they retire," said Michael A. Greeley , managing general partner at IDG Ventures in Boston. "I think every major firm must be contemplating going public."
Greeley said he thought the big buyout firms like Blackstone and KKR were the best candidates for successful IPOs. Venture capital firms, which fund start-up companies, are technically part of the private equity industry. But few of them have the scale to go public, he said.
Blackstone's fresh capital infusion will fuel its expansion, enabling it to buy other private equity firms and expand globally, suggested Lerner at Harvard Business School. "The competitive dynamic is like any other industry," he said. "They're going to have a lot of money in the kitty, and their rivals are certainly going to feel some pressure to respond. But going public is a two-edged sword."
In addition to dealing with regulators and filing financial reports, private equity partners opting for IPOs are raising their profile and inviting a backlash by lawmakers. This week's proposal by Max Baucus , Democrat of Montana and chairman of the Senate Finance Committee, and Charles Grassley of Iowa, the panel's ranking Republican, would tax firm partners' performance fees at the ordinary top income rate of 35 percent rather than the lower capital gains rate of 15 percent enjoyed by the financiers today.
The resulting billions in new taxes could offset a loss of revenue from moves to lift the burden of the alternative minimum tax on middle-class taxpayers, said Gil B. Manzon , associate professor of accounting at Boston College's Carroll School of Management. "It's like there's bag full of dirt," Manzon said. "So if you take the dirt from the alternative minimum tax away, you're going to have to find more dirt."
Robert Weisman can be reached at weisman@globe.com. 
