Dan Pedrotty, director of the AFL-CIO’s Office of Investment, told CNBC’s “Morning Call” that Blackstone Group should be required to register as an investment company before launching its IPO.
“Our reading of this IPO is that Blackstone deliberately structured it in a way to hide the fact that what they’re really offering is an investment company,” Pedrotty said Thursday. “They’re selling interests in pools of securities.”
He said that allows Blackstone to sell an interest in hedge funds while avoiding regulations that prohibit fraud, self-dealing, theft and breach of fiduciary duty.
“The problem, as we see it, is: others will follow – mutual funds, other private equity firms are eyeing this transaction very closely,” Pedrotty said. “We feel the SEC should enforce the law and require Blackstone to register as an investment company under the 1940 act.”
Blackstone Group, a private equity buyout firm, plans to offer 12.3% of its management division in an IPO. The deal isn’t a Real Estate Investment Trust and gives investors no direct connection to the hundreds of companies and real estate properties it manages. Investors will have no say in Blackstone’s portfolio or investment strategy. The IPO is scheduled to be priced and begin trading the week of June 25.
Ron Geffner, an attorney at Sadis & Goldberg and former SEC enforcement lawyer, said Pedrotty’s concerns are covered by current state and federal law.
“My understanding is that it’s an offering in the management of all these various vehicles,” Geffner said. “If I bought shares in McDonald’s, am I entitled to the secret sauce formula? No – it’s going to damage the company…I think what you should be looking for is the compensation being received by officers, equity grants – things of that nature.”
He said the details of the planned IPO are laid out in the prospectus.
“If investors don’t understand what they’re investing (in), they have an option not to invest,” Geffner said. “They’re getting audited financials of revenue. They have access to the business plan of the company, a detailed explanation of what it is they’re doing and how they are making money.”