bloggingbuyouts

I've been bearish on The Blackstone Group (NYSE: BX) as a public company since before the IPO for two reason: 1) the IPO had all the hallmarks of a classic top of the market cashout for insiders, and 2) the company had poor corporate governance, leaving insider Stephen Schwarzman in what amounted to complete control of everything, with the shareholders at his mercy.

In The Wall Street Journal, George Anders reports (subscription required) on just how much of a corporate governance chamber pot Blackstone is: "Blackstone's top executives set their own pay, without the checks and balances -- sometimes perfunctory, sometimes real -- set up by other public companies."

Blackstone has no compensation committee, so partners Schwarzman and co-founder Peter Peterson make their own pay decisions.

Perhaps this explains how Schwarzman earned $350 million in 2007, in spite of the evaporation of more than $4 billion in market value since the company's IPO in June.

I know that a lot of investors are looking at Blackstone anew now that is dipped down to the $16 per share range. But without good corporate governance -- or any meaningful corporate governance -- I would still be skeptical about the company.

It's also disappointing that the New York Stock Exchange provides a market for companies that are run for their benefit of their insiders, not their shareholders.

Stephen Schwarzman managed to make the Fortune "Man of the Moment " feature and end up on the Time 100. Last year he threw himself a famously excessive birthday bash as he turned 60 on Valentine's Day.

What a difference a year makes. Over the twelve months since his little party, Schwarzman has been the target of vicious attacks in the press. He recently told The New Yorker, "How does it feel? Unattractive. No thinking person wants to be reduced to a caricature."

But, Schwarzman has not been reduced. He has been "super-sized" in the way that people who brag about how much dough they have almost always are. The very wealthy in the US rarely talk about being filthy rich. They simply give their money away a la Bill Gates or Warren Buffett. No one knows the names of the great majority of people on the Forbes 400.

Schwarzman will have a more modest birthday party this year, according to press accounts. He may be saving money to give back to shareholders who invested in Blackstone (NYSE:BX) last year. The shares hit $38 after the IPO and now trade at under $18. About $4.5 billion in shareholder value has gone down the drain. He has also been a bit hard on shareholders at other companies. Blackstone backed out of a deal to buy Alliance Data (NYSE:ADS). Those shares moved from $81 to under $56. That's another $3 billion in shareholder money gone.

Instead of whining to the press about being stomped on by people who have lost money investing in Blackstone or Blackstone-related deals, perhaps he should get a wig and sunglasses so that he can walk around unnoticed, like Greta Garbo did.

Douglas A. McIntyre is an editor at 247wallst.com.

A piece in this week's issue of Barron's look at (subscription required) The Blackstone Group (NYSE: BX), wondering whether the stock that has performed brutally since its IPO might at last be worth a look.

The company is trading under $18.50, down from a post-IPO high of $38 reached in June, and sports a dividend yield of around 6.5%.

But Barron's warns investors that they could be in for a surprise: "Few shareholders are aware of Blackstone funds' "claw back" feature, requiring the company to refund to investors already-booked incentive fees if subsequent investments suffer. Claw backs are common in private equity, but rare among traditional asset managers and hedge funds. They protect investors from paying big fees and then getting disappointing returns."

Problems in the credit markets and a lackluster economic outlook could trigger clawbacks, and some of Blackstone's past earnings could evaporate in a wave of charges. That would definitely be bad news for anyone buying the stock at its current levels.

I'll be staying away from Blackstone for a different reason entirely: at the time of the IPO, I thought that it was a cynical effort by chairman and CEO Stephen Schwarzman to cash in some of his chips at the top of what he saw was a bubble. Add in concerns about the company's accounting, and this is just not a company that I find myself completely trusting.

And if I can't trust the management, I'm not going to touch the stock.

Blackstone Group LP (NYSE: BX) Chief Executive Stephen Schwarzman, who became a billionaire thanks to the firm's recent initial public offering, won't be able to stop the U.S. Congress from making his firms pay higher taxes particularly as the presidential election looms.

Legislation proposed by Sens. Max Baucus (D-MT) and Charles Grassley (R-IA) would TRIPLE the amount of taxes that the New York-based company would pay annually. The company is arguing that the Baucus-Grassley bill raising taxes on private equity and hedge funds would deprive the government of revenue because it would discourage companies from going public.

Blackstone won't win too many friends on Capitol Hill with that argument since hedge funds already get a huge break from the IRS because they pay taxes at the 15% rate of partnerships instead of the 35% corporate tax rate. To many people and quite a few economists this just doesn't seem fair.

Politically speaking this also is a losing issue for Blackstone. Americans believe in the Horatio Alger myth that by hard work and luck anyone can become rich. The public, though, has little sympathy for people who climb their way to the top by cutting corners or getting breaks that they don't seem to deserve.

The Democrats in Congress are well attuned to this reality. For them, there is no better industry to target than hedge funds and private equity firms. To most Americans, the industry is mysterious and scary. What possible downside could they have in targeting the likes of Blackstone?

Stephen Schwarzman may be Blackstone Group LP's founder and CEO, and (let's face it) the sexiest of all private equity players this week. But "sexiest" and he-of-the-longest-tenure doesn't necessarily mean the most important. At Blackstone, the title of "most important" may very well be held by Hamilton E. "Tony" James.

In private equity firms as in investment banks and, to a lesser extent, venture capital firms, the "rainmaker" is the guy who makes or breaks the company's fortunes. While Schwarzman may be the schmoozer, the guy whose birthday parties are the most fabulous and whose paychecks and public statements are the most scrutized, it's Tony James who (if the Wall Street Journal's take is any indication) brings home the bacon.

Indeed, his tenure at the first isn't long. But with rainmakers as a class of people, "patience" and "longevity" are not known as generally-held values. James, like so many of the quietest and most influential at the top of private equity firms, has a thoroughly Harvard pedigree, having graduated magna cum laude and John Harvard Scholar as an undergrad, then going on to earn an MBA and the "Baker Scholar" designation from HBS. In other words, an unqualified smarty pants of the highest order.

When he was still young enough to be called a "whiz kid," he was a banker at Donaldson Lufkin Jenrette.

File this one under "CEOs say the darndest things."

Tonight, as we learn The Blackstone Group seeks to raise $4 billion in an initial public offering, I can't help but remember a headline I read less than a month ago. It was in The New York Times' DealBook: "Don't Hold Your Breath On A Blackstone IPO."

Nonetheless, Stephen Schwarzman reportedly complained at a European private equity conference on Feb. 27 that rival firm Kohlberg Kravis Roberts had "destroyed the market" for anyone else, with its super-sized $5 billion IPO last year. His beef, then at least, was that the capital markets' appetite for private equity shares was sated by the KKR deal.

The Times' Andrew Ross Sorkin opined, " Mr. Schwarzman seemed uninspired by the notion of a buyout firm I.P.O. anytime soon," and quoted him saying (via Reuters), "I think the public markets are overrated."

Now it turns out that when Schwarzman made his comment, the process must have already been well underway. Blackstone's S-1 is more than 220 pages long and investment banking firms listed include
Morgan Stanley, Citigroup, Merrill Lynch & Co, Credit Suisse, Lehman Brothers and Deustche Bank Securities. These guys clearly have been talking a while.

Guess those wily bankers were able to get him to change his mind pretty darn quick. How many additional billions added to the deal did that take?

The rumors were true! Today at the market's close, Blackstone Group LP filed with the SEC to raise up to $4 billion in an IPO. The S-1 is huge and full of all kinds of little juicy details that I'm sure we'll be analyzing in depth over the coming weeks. I can't wait to read the clause entitled "Firm Use of Our Founders' Private Aircraft."

However, until further examination, we can't answer the most important question asked earlier today: how much does founder, chairman and CEO Stephen Schwarzman make? He and other important officers actually don't draw salaries or bonuses and are instead paid out cash distributions of the firm's investment gains each year. How much were they paid for 2006? That part is blank, in all likelihood because it hasn't yet been paid out for the year (although I'd be willing to lay odds the management team knows how much they made in 2006). Crafty! [Update: Deal Journal's Dana Cimilucca was sharper-eyed than I and found one nugget: following the offering, Schwarzman will draw a modest, Warren-Buffett-sized salary of $350,000. Our original question -- what does Schwarzman make today? -- is still unanswered.]

The huge potential amount of the IPO will certainly make for interesting philosophical discussions over the next few months. Oh, and we have one more question to answer: which banks lead the deal? Morgan Stanley and Citigroup are the guys with top billing; Merrill Lynch & Co, Credit Suisse, Lehman Brothers and Deustche Bank Securities round out the group making millions in fees on Blackstone's coming march to the public markets.