UPDATE 2-Union group seeks changes in Blackstone IPO

(Adds Stern, Lowenstein, Frank comments; background, byline)

By Kevin Drawbaugh

WASHINGTON May 16 (Reuters) - The largest American labor federation on Wednesday asked regulators to force changes to a $4 billion initial stock offering by Blackstone Group [BG.UL], one of the first major U.S. private equity firms to go public.

With Congress looking at how private equity buyouts affect workers and the economy, the AFL-CIO urged regulators to require Blackstone to register as an investment company and follow the same laws governing mutual funds.

The labor federation told the Securities and Exchange Commission in a letter it believed Blackstone "deliberately structured its public offering ... to hide the fact that the Blackstone Group LP is actually an offering of interests in pools of investment securities."

"That's unacceptable, and the SEC should step in and enforce the law," AFL-CIO Secretary-Treasurer Richard Trumka said in a statement.

The AFL-CIO represents more than 10 million workers and has an active investor-rights program. Union-sponsored pension plans hold about $400 billion in investment assets.

The AFL-CIO's attack on the Blackstone IPO comes at a time of unprecedented private equity activity.

A record $911 billion was invested globally in private equity deals last year, up from $471 billion the prior year and nine times the amount of private equity invested in 2001, private equity pioneer Henry Kravis recently told Reuters.

Private equity firms are pools of money provided by independent investors that are typically used to buy companies, improve their performance and sell them at a profit.

The firms often acquire publicly held corporations and take them private, which reduces pressures from Wall Street for short-term results, ends the need for public disclosure of results and usually adds substantial debt to the books.

The $4 billion Blackstone initial public offering (IPO) is being closely watched by the markets as one of the first from a large U.S. private equity and hedge fund firm.

With $78.7 billion under management, Blackstone has been in on some of the biggest leveraged buyouts ever, including the $23 billion purchase of Sam Zell's Equity Office Properties.

The New York firm manages a half-dozen funds involved in private equity investing, real estate and distressed debt.

In a March prospectus filed with the SEC, Blackstone said its listed entity was a partnership exempt from the governance requirements of investment companies. Those requirements include a fiduciary duty to stock market investors and a majority of independent directors.

The SEC and Blackstone declined to comment.

The AFL-CIO letter to the SEC was released ahead of a hearing in the U.S. House of Representatives Financial Services Committee where lawmakers heard another labor group voice concerns about the impact on workers of private equity.

"The income being accumulated by private equity is a major contributor to the concentration of wealth among the top 1 percent of Americans," Service Employees International Union President Andrew Stern said at the hearing.

Douglas Lowenstein, president of the Private Equity Council, which represents the firms, said they are a positive force in the economy that "can create a successful operating environment for companies."

Committee Chairman Barney Frank, a Massachusetts Democrat, told reporters after the hearing that it was too soon to tell whether legislation was needed on the private equity issue.

Increased attention was drawn this week to the issue by a $7.4 billion bid for automaker DaimlerChrysler AG's DCXGn.DE Chrysler Group by private equity firm Cerberus Capital Management. [CBS.UL]. (Additional reporting by Michael Flaherty in New York, Marc Jones in London)