bloggingbuyouts

It's finally here – the Blackstone Group LP (NYSE: BX) IPO. The stock is up about 15% even though the Dow is down 116 points. There are also serious concerns about some ailing hedge funds from Bear Stearns (NYSE: BSC).

I had a chance to interview Steven Howard, who is an attorney at Thacher Proffitt & Wood and an expert on private equity. His thoughts on the Blackstone IPO?

"It's of course difficult to predict the length of business cycles for sectors of the economy, but most commentators agree that the business cycle for private equity is mature, and that Blackstone is cashing out at the top. I believe that the top has not yet been reached, that Congress will not legislate any curtailments to the private equity/hedge fund business until at earliest the first quarter of 2008, so there is plenty of time for others in the IPO pipeline, like KKR, Apollo and others to explore the top. Nevertheless, Blackstone's IPO is very lucrative to Pete Peterson and Steve Schwarzman, and their senior managers. Just as Blackstone has wisely accelerated their IPO, so will the next group of IPO registrants in the rush to the market in the hope that they may get some 'grandfathering' benefits from any legislation, if in fact it is enacted in 2008.

"These private equity funds are notoriously difficult to value because of the nature of their investments which are illiquid and often require a sale to a third party before the private equity fund realizes any gains or losses from the investment. As a consequence of the difficulty to value the underlying investments, Blackstone may trade at a discount to its NAV (net asset value) over time, as closed-end funds typically trade at a discount to NAV in the aftermarket following their IPOs.

"Interestingly, investors in Blackstone will not be entitled to vote on who the managers of the Fund will be. Because the Fund is structured as a partnership, there is no equivalent of a Board of Directors. Peterson and Schwarzman will run the Fund until Peterson retires in December 2008 when Schwartzman will run it solo. Blackstone says in its Registration Statement that it did not want to change in any way its management since it's been so successful, so no shareholders' meetings ever, very limited corporate governance by public company standards and very little protection from conflicts of interest.

"A final note, it is a major mistake for anyone to underestimate the strength of the private equity/hedge fund lobbyists in Washington, DC, especially with a presidential election year in the very near future in which it is likely that THREE candidates will be from NYC (Clinton, Giuliani and Bloomberg), the home for many private equity and hedge funds, including, of course, Blackstone."

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

This morning's Wall Street Journal [subscription] scored a coup -- an exclusive interview with Blackstone Group's (prospective trading symbol BX) CEO Steve Schwarzman.

The interview's theme -- that Schwarzman is the private equity industry's answer to Napoleon -- did not delve into the question of whether it makes sense to invest in what Schwarzman is selling to the public. But it did include some fascinating personal details:

• At 5' 6" he is a "little man" who wants to "inflict pain" on and "kill off" his rivals;
• He noticed that one of the servants at his 11,000 square foot Palm Beach mansion wore squeaky rubber soled shoes;
• He ate $400 worth of stone crabs there during his 15 minute lunches; and
• He neglected to invite his rival -- KKR partner, Henry Kravis-- to his lavish 60th birthday celebration -- to which a huge portrait of Schwarzman, which usually hangs in his living room, was shipped -- because he had never been invited to Kravis's home.

Should you invest with him? Yes. However, the securities he's selling in this IPO will not enable you to do so. I have been plowing through its prospectus and have come to the conclusion that you should avoid these securities. Here's why:

Wow! That was my initial reaction when I read the Bloomberg News story about the pay accruing to Blackstone Group's top executives. And yet, compared to hedge funds, these guys are lightweights. When you look at their photos, though, you can only come to one conclusion -- it pays to be bald!

Blackstone Group LP co-founders Stephen Schwarzman and Peter G. Peterson will get $2.33 billion and keep 28% of the company after its planned initial public offering. That was interesting but what really got my attention is their pay -- Schwarzman made $398.3 million last year and will own Blackstone shares worth $7.7 billion while Peterson took in $212.9 million in 2006 and will own $1.31 billion worth of stock after the deal is done.

This seems like a nice payday but it depends on whose you compare it to. Schwarzman's pay is about 7.4 times that of Goldman Sachs Group Inc.'s (NYSE: GS) CEO Lloyd Blankfein -- who made only $54 million in 2006 and 6,638 times that of the average U.S. family which pulled in $60,000 last year.

Yet Schwarzman's $398 million is less than a quarter of the $1.7 billion that top hedge fund manager, James Simons, pulled in last year. Do you feel sorry for Schwarzman now?

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Goldman Sachs.