'Private equity' now open to the public
The realm of financial wizardry known as "private equity" is becoming increasingly public.Skip to next paragraph
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The latest twist: Average investors on Main Street can buy into the trend – although they will want to consider the risks as well as the potentially rich rewards.
Privately owned buyout shops now control a sizable slice of US industry, from Albertson's supermarkets to Hospital Corp. of America. These outfits, which aren't listed on any stock exchange, have fueled a surge of corporate acquisitions in the past year.
They claim to be practicing a superior form of capitalism, freed from the constraints and regulations faced by publicly traded firms.
What's indisputable is that their presence has been growing.
Now the Blackstone Group, one of the largest private-equity players, has announced plans for a common-stock offering.
The move doesn't mean Blackstone will become a tame, ordinary company. It will still be in the private-equity business. But the move is a sign that private equity is carving out a mainstream niche for its rebel task of radically reshaping companies.
"It's a new phase," says Pavel Savor, a finance expert at the University of Pennsylvania's Wharton School in Philadelphia. "I think it will be a trend," he adds, with some other large buyout firms offering stock to the public as well.
On its surface, the Blackstone news sounds odd.
This is a firm, after all, that for two decades has been investing big bucks to buy publicly traded companies and manage them under its wing. Early this year, it clinched what is nominally the biggest private-equity deal ever – a $39 billion buyout of the real estate company Equity Office Properties.
Having espoused the virtues of close private ownership, why does Blackstone want to go public? That's a question still being debated, days after the firm's March 22 announcement that it was taking preliminary steps toward a stock offering.
But Blackstone did make clear that it was not abandoning its heritage. Its managers will still retain control of the deals they do.
And they will still have a big personal stake in the success of those deals. In fact, according to news reports, Blackstone plans to spin off only about 10 percent of the company.
The new shareholders, moreover, won't be buying any direct stake in Blackstone holdings such as Equity Office Properties. Rather, they will be buying a portion of management's returns on those deals.
Word of the initial public offering comes amid a boom in private-equity deals that has made the buyout shops the subject of attention, both good and bad.
To supporters, the deals are helping companies in a range of industries take risky but profitable steps that they would not do under the more cautious mind-set of public ownership.
But critics say the buyouts benefit the private-equity partners – and the managers of the target company who often join them – more than they help the economy at large.
"We don't have any interest in seeing Chrysler sold to a locust," Joerg Hofmann, an official with the German labor union IG Metall, told the Berliner Zeitung, according to Reuters, in response to news that DaimlerChrysler may sell its American division to a group backed by private equity.