Blackstone IPO overshadowed by tax issues

The early indication from roadshows marketing the US$4.1bn IPO of Blackstone Group is that investors are eager to hear the story and the books are filling up quickly.

The private equity giant intends to structure itself much like a master limited partnership where all proceeds are used to purchase partnership interests from existing owners. Under this structure, Blackstone will be taxed solely upon its distributive share of income, but this will change if new tax legislation introduced to the US Senate last week is passed.

“The nature of investment vehicles is changing right before our eyes, and the tax code must keep up with the times,” said Montana senator Max Baucus as he and Charles E Grassley, the senator from Iowa, introduced a bill that would require publicly traded private equity firms and hedge funds to be subject to paying corporate tax.

As tax laws stand, Blackstone is subject to only one level of taxation, but Baucus argues that “if a publicly traded partnership makes its money by providing financial services, that active business should be taxed as a corporation”.

Of course, such taxation would have a negative effect upon Blackstone’s future net earnings as well as its IPO valuation. The question is, how much? As of Friday, the Blackstone offering remained as 133m shares at a US$29.00–$31.00 price range. The shares are expected to price on Monday June 25.

Earlier, Blackstone took steps in building out its underwriting team. Initial filings named Morgan Stanley and Citigroup as joint-bookrunners with Merrill Lynch, Credit Suisse and Lehman Brothers in supporting roles, but more recent filings indicate that the books have been expanded to include Goldman Sachs and JPMorgan as part of a 17-bank effort.

“Blackstone wants research coverage. That’s the bottom line,” noted one banker, but it is unusual that a firm such as Goldman Sachs, or JPMorgan for that matter, would take a minority position on any deal. Nevertheless, the economics at stake are hard to ignore. Blackstone’s 20m-share greenshoe amounts to US$620m and is bigger than most IPOs.

Robert Sherwood