The Blackstone Group is coming to Wall Street this week.
The big private-equity group set plans Tuesday to price its initial public offering of stock Thursday evening. Shares should start trading under ticker BX on the
New York Stock Exchange
The blockbuster $4.75 billion deal marks another milestone in the growth of alternative investment firms such as hedge funds and private equity. Blackstone's IPO is the first public offering for a private-equity firm, following February's successful offering by hedge fund
Fortress Investment Group
. The Blackstone deal had been expected to price next week.
Blackstone and other alternative investment outfits have come under intense scrutiny as of late, as the Senate Finance Committee considers a bill that would increase the tax rate for those entities.
The Fortress and Blackstone IPOs used a loophole in the existing tax code that allows them to benefit from a 17% partnership tax rate, rather than the 35% rate that typically applies to conventional companies.
Blackstone made a statement last Friday warning investors to take into account the implications the tax proposal might have on its business and therefore its share valuation.
The proposed amendment, if enacted, would crimp the returns of privately held alternative investment management shops seeking to go public. Many hedge funds and private-equity companies have at least considered doing so since Fortress sold shares to the public in February. Blackstone later announced it would do the same.
Despite the tax scrutiny, Blackstone never second guessed its decision to shop its shares, say industry watchers. Blackstone CEO and co-founder Stephen Schwarzman looks to rake in $677 million from the IPO and achieve a net worth of $7.5 billion from his stake in Blackstone.
Some observers question the tax push, saying boosting taxes on alternative investment firms could end up hurting some of their largest stakeholders: pension funds and insurance companies.
"It doesn't make a lot of sense to disincentivize people who are making money for large pension funds," says Andrea Cohen, an attorney at Nixon Peabody in San Francisco who represents private-equity firms. "It could really damage the market."
She adds that the industry is taking a wait-and-see approach about how the tax situation might play out in the coming months and years. But another lawyer sees risks coming from another direction.
"Once you've got a corporate-level tax, the only way to ameliorate that tax is to use leverage to reduce taxable income, which may or may not work," says White & Case private-equity attorney Linda Carlisle. She says the increased leverage could dissuade investors such as pensions from investing in private equity and hedge funds, because of the increased risk tied to such a strategy.
To view Mark DeCambre's video take of this column, click here