Blackstone Group LP (NYSE: BX) units rose 13 percent in their first day of trading on Friday, as the first major U.S. private-equity firm went public and minted billions of dollars of new wealth for its founders.
Closely watched by Wall Street and Washington, the units shot up 23 percent to $38 in early trade. But they then slipped below an opening price of $36.45, indicating selling on concern over higher U.S. taxes for the industry or on doubts the ideal conditions for private equity of recent years would persist.
The opening price was less than people had speculated, said Al Goldman, chief market strategist at brokerage A.G. Edwards. Maybe people are concerned Congress is trying to raise taxes for this type of company ... People are wondering what's going on. Are the insiders selling because they think the party is about over?
Blackstone's sale of 133.3 million units at $31 apiece, the top of its range, was about seven times oversubscribed, showing strong demand from investors eager for a stake in one of the world's most profitable and rapidly growing money managers.
The $4.13 billion offering on the New York Stock Exchange was the largest U.S. IPO in five years and the eighth-biggest by a U.S. company ever, excluding overallotments.
On its first day as a public company, interest stayed strong with more than 76 million shares changing hands.
It has done remarkably well even though it was a tough day for stock markets, said Scott Sweet, managing director for research firm IPOboutique.com. It was a very large offering, and trading has been incredibly active.
The S&P 500 Index, a bellwether of U.S. stock activity, fell about 1.2 percent on Friday.
This stock is the real thing. Private equity has generated a lot of hoopla on Wall Street, said NYSE floor broker Steven Grasso of Stuart Frankel & Co.
Blackstone ended the day at $35.06, giving it a market value of nearly $38 billion -- on par with military contractor Lockheed Martin or consumer bank Washington Mutual, and just shy of Lehman Brothers' $41 billion market capitalization.
If underwriters led by Morgan Stanley and Citigroup opt to issue 20 million more shares, the IPO will generate an extra $620 million, for a $4.75 billion total. Blackstone separately sold $3 billion of non-voting shares to China's government.
The IPO ushers in a new era for an industry that has come to dominate financial markets worldwide by pursuing ever-larger takeovers and raising record amounts of capital. Last year private equity buyouts reached about a fourth of global merger and acquisition volume, versus just 5 percent a few years ago.
With investors hungry for high returns, Blackstone increased private equity, real estate and hedge fund assets under management to $88.4 billion, up an average 34 percent a year since 1995 and 41 percent a year since 2001. A firm with just 770 employees made $1.12 billion of revenue last year.
For those people who have seen the phenomenal results of the Blackstone Group, it's an opportunity for them to invest in a proven private equity franchise, said Michael James, a senior trader at Wedbush Morgan in Los Angeles.
The heavy demand for and initial success of the IPO, giving Blackstone permanent, low-cost capital for expansion, may spur rivals such as Kohlberg Kravis Roberts, Carlyle Group and TPG Capital to pursue similar offerings.
The Blackstone offering also showed how private equity founders could reap enormous personal gains. At $35.06 per unit, chief executive and co-founder Stephen Schwarzman's personal stake rose by $1 billion to $8.75 billion, while co-founder Peter Peterson's stake was worth $1.53 billion.
Blackstone President Hamilton Tony James, in line to succeed Schwarzman, has a stake valued at $1.82 billion.
Yet several analysts noted the shares did not have the same initial pop as other, recent IPOs among investment and trading companies. According to Dealogic, Blackstone's first-day performance ranked 26th out of the 98 U.S. IPOs that priced this year, excluding REITs and acquisition companies.
In February, Fortress Investment Group LLC became the first U.S. private equity and hedge fund firm to go public. Its shares jumped 68 percent in their first day of trading, the biggest one-day gain among U.S. IPOs this year.
Fortress is down 20 percent since the first day, prompting some analysts to applaud Blackstone's debut as more orderly.
A lot of errors were made with Fortress opening so strong. It was unable to sustain those high altitudes, said David Menlow, IPO analyst at IPOfinancial.com.
IPOboutique's Sweet sees Blackstone's units rising further. Once the frenetic trading activity slows down it will get in a trading zone, and providing there is no unforeseen news from Blackstone, I would say $40 is not unrealistic by mid-summer.
But so far in 2007, about half the year's IPOs that have jumped 10 percent or more in their market debuts lost those first-day gains by one month later, according to Dealogic.
For American International Group Inc., which bought a 7 percent stake in Blackstone for $150 million in 1998, the IPO was a huge windfall. We calculate AIG's new value of its investment in Blackstone could be approximately $1.9 billion to $2.1 billion, said Thomas Cholnoky of Goldman Sachs.
New Blackstone investors are entering uncharted territory. The common units give them a limited say on corporate matters. And lawmakers on Friday introduced a bill to tax private equity gains at a higher rate, knocking 6.3 percent off Fortress.
Some critics also question whether Blackstone, now trading at 27 times trailing-year adjusted earnings, is too expensive. Goldman Sachs, a Wall Street bank that is also a leading private equity investor, fetches about 10 times earnings.
You're going to have to wait until next year to see if those (Blackstone earnings) estimates were conservative or realistic, said Wedbush Morgan's James.
(Additional reporting by Michael Flaherty, Ellis Mnyandu, Caroline Valetkevitch and Anupreeta Das)