Notes on an IPO

Stuart Mills, a managing partner at law firm Kirland & Ellis' London office until his retirement last year, agreed to share with PEI Manager some of his analysis on the terms and conditions in The Blackstone Group's IPO prospectus. Blackstone recently filed to take its management company public in one of the biggest IPOs in US history. The firm is offering common units representing limited partner interests in The Blackstone Group. The firm intends to apply to list its common units on the New York Stock Exchange.

Pricing: The preliminary prospectus contains no pricing information. Until the prospectus is amended (in approximately one month's time) we will not know the price of the shares, the aggregate proceeds to Blackstone, the amount to be paid over to Blackstone's founders and other professionals, the implied value of the company, the implied value of the founder's stakes, etc.

Corporate governance: Unlike holders of common or ordinary shares in a company, the public shareholders will have only limited voting rights and will have no right to elect Blackstone's general partner or its directors, which will be elected by Blackstone's founders. There are only a few matters on which the public shareholders can vote, and with respect to those matters it appears that the Blackstone professionals will hold special voting units which will, at least initially, enable the Blackstone professionals to outvote the public shareholders.

Economics: The public shareholders will be entitled to less than 100 percent of the Blackstone economics (carried interest, management fees, incentive fees, transactions fees, etc.). The prospectus does not yet specify the actual percentage. However, until December 31, 2009, the public shareholders will benefit from priority distributions, but again the amount of the priority is not yet specified.

Compensation: The Blackstone professionals will not benefit from golden parachutes. They plan to offer relatively low salaries to their investment professionals. For instance, Stephen Schwarzman, chairman, CEO and co-founder of Blackstone will receive no compensation other than a $350,000 salary. However, Schwarzman and the others will be entitled to participate in the Blackstone carried interest program that is typically the most lucrative form of compensation for private equity professionals Carried interest is usually taxed at lower capital gains rates. (See p.35 for more details on Blackstone's IPO filing.)