Private equity may open its doors

One of the industry's most powerful players may be considering an IPO - which would give everyday investors access to the exclusive world of private equity.

By Grace Wong, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- The exclusive world of private equity may soon open its doors to a whole new set of investors.

Blackstone Group, one of the most powerful private equity players, is reportedly planning an initial public offering that could come to market in the next few months.

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Blackstone Group CEO Stephen Schwarzman

Blackstone declined to comment.

Such a move would likely trigger a wave of IPOs among private equity firms, experts said. It also would widen access to an investment vehicle which until now has only been available to wealthy investors and institutions.

"It's a high profile offering that's going to give a lot of smaller investors an opportunity to buy into private equity, where there's been so much activity," said Andrew Sherman, a partner at Washington-based law firm Dickstein Shapiro.

Blackstone, led by CEO Stephen Schwarzman, has been one of the most active firms in the private equity pack. The company recently made headlines by claiming victory in a fierce bidding war for Equity Office, a company it ended up paying $39 billion for.

Private equity firms like Blackstone specialize in buying companies with mostly borrowed funds. Their aim is to buy firms, fix them or grow them and then sell them - often reaping hefty returns for their investors and pocketing hefty fees for themselves in the process.

Buyouts have boomed in the past few years, fueled by the availability of cheap debt. Last year, they accounted for one-fifth of the $3.8 trillion in deals worldwide, according to Thomson Financial.

Private equity firms aren't strangers to public markets. Private equity giants Kohlberg Kravis Roberts and Apollo Management both have publicly listed funds. But the Blackstone deal is believed to include the floating of the firm's management company, which would make it the first such IPO among buyout firms in the U.S.

Such a move by Blackstone would likely lead more firms to go down that road. "A Blackstone IPO would break the ice," Harvard Business School professor Josh Lerner said. "If Blackstone proves to be successful, other groups will think seriously about it," he said.

An IPO by a major private equity group has been expected for some time. Several of the biggest firms face the issue of succession as their top dealmakers near retirement. A successful public offering would give senior partners a profitable exit as well as help companies attract new talent.

Publicly traded shares could also give private equity firms, which face a competitive environment for deals, an edge when it comes to vying for targets.

If Blackstone goes public, it will be able to use its shares to make acquisitions, putting it on the same ground as corporate buyers, Sherman said. "It's a new form of currency with which to do acquisitions," he said.

The timing for an IPO apparently couldn't be better. Investors have been eager to scoop up shares of firms that have benefited from booming financial markets.

Shares of Fortress Investment Group, the first hedge fund to go public, surged 68 percent on their first day of trading last month. The stock closed Friday at $25.74 a share, up 39 percent from an offer price of $18.50.

But investors banking on a Blackstone IPO should be careful. Private equity firms can turn in volatile results that may not go over well among public investors who like to see consistent quarterly results.

Furthermore, investors will face a challenge when it comes to valuing a firm like Blackstone, according to Brian Hamilton, CEO and co-founder of Sageworks, a financial analysis firm that focuses on private companies.

"The way you would evaluate a private equity firm over the long run is by evaluating the composition of its portfolio, but that's not publicly available data. Even if it were, it's extremely difficult for any outside party to objectively assess the quality of those investments," he said.


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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.