BX: The Blackstone Group

Jun 23, 2007 8:00 AM

PEIC :

6/22/2007 5:09:37 AM
From: pcyhuang of 1343

Interesting Read: A Dire Warning on Blackstone's IPO



The online WSJ reports: Blackstone raised as much as $4.6 billion last night after 133.33 million common units were sold (at $31 per share) into the offering, making it one of the biggest IPOs on Wall Street...

A bill recently proposed in Washington threatens to tax financial-services partnerships at the 35% corporate rate rather than their current 15%. Although the bill as currently worded gives Blackstone a five-year grace period to enjoy the current tax rate, there is growing chatter about shortening -- or even eliminating -- the five-year period.

At the same time, shareholders will have limited voting rights and will be unable to replace Blackstone's directors. And compensation to employees is expected to rise once Blackstone begins trading, under ticker symbol BX.

Investors tracking the company say they have been guided to expect earnings of $1.75 a share in 2008 -- meaning the stock, at the IPO price, trades at almost 18 times next year's expected earnings. Though some investors are confident Blackstone can make $2.10 a share next year, if Blackstone's tax treatment is changed it will put a crimp on profits. By way of comparison, firms such as Goldman, Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Bear Stearns Cos. trade at an average price-earnings ratio of about 10.

Other asset-management firms, such as Alliance Bernstein and T. Rowe Price, trade at richer multiples of about 20, as do advisory firms such as Greenhill & Co. and alternative manager Fortress Investment Group LLC, reflecting the profitability of those businesses.

Blackstone's shares also seem expensive using other metrics, such as in relation to the firm's assets under management. Blackstone is being valued at almost 40% of its $88 billion of assets, compared with less than 10% for firms such as T. Rowe Price and Alliance Bernstein. The reason: Alternative assets are more lucrative than traditional assets, like mutual funds.

Blackstone's assets under management have soared to $88 billion as of the beginning of May from $14 billion in 2001. One way to keep expanding, and help returns: tapping into its new relationship with China's government to generate a flow of deals there. Blackstone recently sold about $3 billion of shares to an investment vehicle run by the Chinese government.

The money Blackstone is raising, as well as its huge

Jun 23, 2007 1:45 PM

allancoleman :

I listen to Larry Kudlow's show most every day I'm in town and Larry and most of his guests lately seem to agree with you , Kirk , about capital gains taxes going up . Not only that , but most also agree that the highest tax bracket will be 39 1/2 % and some easily see 41% or more .

Other numbers being tossed around are anyone who makes above $200k a year as being " rich " and taxed accordingly with some seeing the rich as being from $150k a year on up .

Jun 23, 2007 3:25 PM

runner26 :

CNBC had a segment where they said that they couldn't find any hedge fund managers who thought it was a big deal.
.
Cramer even said 'so what' to the idea. It doesn't matter.
.
I didn't hear anyone go into specifics about why they didn't care.

Jun 23, 2007 3:39 PM

Im Smile :

For those clambering to buy this pig above say 15/shr, ask yourself why the owner is selling to you now.

If rates are moving north, you do not want to own financials like Bx or GS. Interesting how they chose not to use the symbol BS which is available for use... guess it would have been too obvious a joke.

Jun 23, 2007 4:02 PM

Happy_2 :

The founders retain something like 90% of the stock.
The prospectus says there will not be any
profits for the forseeable future due
to increases in excecutive salaries. The only tangible property are the desks and the computers. You are getting none of the properties owned by investors in the funds run by Blackstone.
At least they are honest.
I don't get it?
But, everyone said the same thing about
Googel when it IPO'd.
I think I heard Pete Petersen, one of the co-founders
say, the company had a net worth of $50,000 20 years ago.
Now that's what I call a profit!

Jun 23, 2007 8:14 PM

permabear :

Like these hedge fund zillionnaires deserve special tax treatment. As John Stossel says on his ridiculous commentaries on the ABC tv show 20/20: <b>Give me a break!</b>

Congress Weighs End to Private Equity Tax Break
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By JENNY ANDERSON and ANDREW ROSS SORKIN
Published: June 21, 2007

Leaders of the tax-writing committees in Congress are considering a new proposal to end a <b>little-known tax break that has allowed wealthy financiers who run private equity firms and hedge funds to cut their total income tax bills by billions of dollars</b>, aides to lawmakers say.

Paul J. Richards/Agence France-Presse - Getty Images
Senators Max Baucus, a Democrat, left, and Charles Grassley, a Republican, are sponsoring a bill to end a tax advantage for hedge funds.

Britain's Private Equity Firms Try to Make the Case for Their Low Taxes (June 21, 2007) The proposal would have a far broader effect than more modest legislation introduced last week by Senate tax writers to increase taxes on private equity firms that go public. That bill covered only a handful of firms, including the Blackstone Group, the private equity firm run by Stephen Schwarzman that is planning to sell shares to investors tomorrow.

By contrast, the new proposal would affect many more firms and could raise $4 billion to $6 billion annually. It may be attached to a tax bill expected as early as July as a way of helping offset the cost to the Treasury of relieving the growing burden of the alternative minimum tax on large numbers of taxpayers, aides said.

The sudden interest on Capitol Hill in increasing taxes on wealthy private equity and hedge fund operators is already running into a storm of opposition from the firms potentially affected and from other lawmakers closely associated with Wall Street.

But even if the recently introduced legislation on publicly traded partnerships does not gain traction, it is clear that tax writers are homing in on a potentially valuable pot of money that could be used to offset other initiatives.

<b>At the heart of the newest proposal is an attempt to bar private equity and hedge fund operators from a longstanding, but little understood, practice that has allowed them to pay a lower capital gains rate of 15 percent instead of the ordinary top income tax rate of 35 percent on their performance fees, which typically represent most of their annual in

Jun 23, 2007 9:26 PM

permabear :

<b>This is GOOD as it encourages Intel to invest in more risky ventures to better compete with China and other countries with far lower tax rates.</b>

Add to many of my recent predictions one more for the record: All these private equity deals are going to be seen as leveraged debt gone wild, just as previous leveraged buyout manias were seen in past years. These deals are not healthy in the least. All they are doing is lining the pockets of these private equity firm founders and leaving the corporaations they are buying saddled with debt. Maybe the corporate tax should be lowered to match global corporate tax rates. But these private equity swindlers don't deserve a penny of favorable tax treatment.