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Blackstone May Not Be a Great Deal for Investors, Analysts Say

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 Friday.

Blackstone, a New York-based private investment fund and advisory firm, filed on Thursday to take around 10% 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 U.S. 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 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.

Room for Caution

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.

Chemoil Energy
Source: Glencore.com
Chemoil Energy

"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% last year to $2.3 billion, revenue from fund and advisory fees grew 125% 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.

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% of the units received by Schwarzman will be fully vested on the date of issuance, with the remaining 75% vesting in equal installments for four years.

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

Range of Businesses

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.

That is a big figure, but understanding how they got there is another thing for an individual investor, said Scott Sweet, managing director for IPO research firm IPOboutique.com.

"The creative financing aspect of putting together a major deal worth billions involves debt, cash and other instruments, and that will be the hardest for the average retail investor to understand," Sweet said.

Estimating a price of Blackstone's IPO is nearly impossible, as that is determined by the underwriters and the firm. People involved in the process are extremely tight-lipped about the possible opening price.

Blackstone and the main underwriters, Morgan Stanley and Citigroup, declined to comment about the offering on Friday.