Blackstone IPO may be tough for some to swallow

By Michael Flaherty and Yung Kim

NEW YORK (Reuters) - Blackstone's pending $4-billion initial public offering may be tempting for individual investors, but shareholders beware: the firm's growth will be tough to maintain, and its business difficult to grasp, IPO analysts said on Friday.

Blackstone, a New York-based private investment fund and advisory firm, filed on Thursday to take around 10 percent of itself public. The filing was a landmark event, as Blackstone is the only major U.S. private equity firm to offer a piece of its general partnership to the public.

The offering will allow both financial institutions and individual investors in the United States a piece of the Blackstone Holdings IPO, with a New York Stock Exchange listing planned to come in the next 80 days, sources close to the process say.

That differs from other offerings issued by such U.S. private equity firms as Kohlberg Kravis Roberts & Co. and Apollo Management, which listed public overseas that were limited to certain investors.

Thanks to a few huge Blackstone deals -- the $23 billion buyout of Equity Office Properties Trust among them -- and a thriving private equity climate seizing headlines, individual investors are likely to clamor for Blackstone shares.

Yet some analysts cautioned that although the firm's success is tough to dispute, the ability to maintain its sky-rocketing growth is less clear.

"Their growth is outstanding, but the law of large numbers is going to catch up with them," said Francis Gaskins, an independent IPO analyst and president of IPO Desktop. "Blackstone can't continue to be number one ... forever."

Net income grew by roughly 70 percent last year to $2.3 billion, revenue from fund and advisory fees grew 125 percent to $1.1 billion, according to Thursday's filing.

Another issue for investors to chew on is the offering's structure, built as a master limited partnership that gives shareholders "units" of the partnership and limits shareholder say. The partnership keeps much of the firm's actions in the private realm and does not require an annual meeting for shareholders. Compensation is determined by top executives, not a committee.

For more on the structure please click on ID:nN22271469.

Another thing for investors to consider is that Blackstone's CEO Stephen Schwarzman has disparaged the public markets, saying they are "over-rated." That has left some on Wall Street to wonder if the Blackstone IPO is meant more for Schwarzman and other top executives to use the equity generated to cash-out at the top as the private equity market nears its peak.

The filing says that 25 percent of the units received by Schwarzman will be fully vested on the date of issuance, with the remaining 75 percent vesting in equal installments for four years.

Still, another issue for retail investors: understanding Blackstone's business.

The firm offers corporate M&A advisory, but also invests a broad range of global funds spanning private equity, hedge funds, hedge fund of funds, mutual funds and debt.

It is best known for its private equity practice, in which they borrow huge amounts of capital through takeover targets to finance acquisitions. Blackstone's private equity practice generated $1 billion of income before taxes last year, the most of any of its branches, the filing says.