Blackstone, one of the world's largest alternative asset managers, has quietly secured a securities underwriting licence as its expanding capital markets operation strays into investment banking territory.
The licence marks the latest stage in the transformation of big listed private equity groups as they become more broadly based alternative asset managers. Apollo and KKR , two of Blackstone's biggest rivals, also have securities underwriting licences.
The move highlights the pressure listed private equity groups are under to generate new sources of fee income to satisfy their public shareholders.
"The private equity business is lousy for shareholders," says the head of capital markets for one buyout firm that is not listed.
Of the big listed buyout groups, only Carlyle says it does not have an underwriting licence and does not plan on getting one.
Although in the early stages, moves into underwriting have raised concerns among private equity fund investors who fear the groups are straying from their core activities. Private equity executives are also voicing concerns about the possibility a group such as KKR or Blackstone could underwrite a public listing of a company jointly owned by a team of private equity investors.
"What value do they add?" asked the head of capital markets for a private buyout firm.
If the underwriting operations grow significantly, investment banks may also be threatened by private equity groups, but to date the banks appear relaxed. Goldman Sachs and Morgan Stanley invited KKR into a bond deal soon after it formed its underwriting unit.
"We have complex relations with the PE firms," said one investment banker focusing on private equity clients. "But not conflicts. And why shouldn't they capture additional revenues from the companies they control? It is just about incremental revenues."
In an apparent contradiction, Blackstone's website says: "Unlike competitors that also provide securities underwriting, trading, research and other ancillary businesses, we are truly conflict-free."
The statement could be seen as a veiled dig at arch rival KKR, which already generates more than 100 million dollars annually in revenues from its underwriting activities. KKR aspires to be a leading underwriter, earning fees from its portfolio companies when they refinance or raise equity as well as working for independent companies when they seek to raise capital.
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Blackstone's ambitions to date are more modest. "It is just an arrow in the quiver," says one person familiar with the matter. "It is a way to serve clients in corporate restructuring or in the mergers advisory business or in the private equity portfolio. If it proves interesting, Blackstone may grow it over time."
The private equity groups so far are not planning to hire networks of salesmen, traders and research analysts.
Underwriting initial public offerings also poses risks. Private equity groups could face legal action in the event they underwrite a botched IPO of one of their own portfolio companies.