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Private equity IPO a hit on NYSE

The Baltimore Sun

NEW YORK -- Shares of Blackstone Group rose 13 percent on their first day of trading yesterday, as investors rushed to latch onto the private equity boom that has swept corporate and financial America.

Given the fanfare surrounding the company, the event seemed more like the coronation of a new Wall Street monarch than the public debut of an up-and-coming company.

And the stock's "pop" - on a day when the broader market fell sharply - was another sign of how buyout shops such as Blackstone are challenging old-school investment banks and brokerages for dominance.

"It shows that the makeup of the big financial institutions that run Wall Street is fundamentally changing," said Benjamin F. Phillips at Putnam Lovell NBF Securities Inc.

Private equity firms buy and restructure companies in hopes of selling them at far higher prices within a few years. Along with their close cousin, hedge funds, these firms have reshaped Wall Street by playing ever bigger roles in corporate mergers, securities trading and global finance.

Blackstone raised $4.13 billion by selling 133.3 million shares in the biggest initial public stock offering since consumer finance company CIT Group went public in 2002.

The shares, which trade as "BX" on the New York Stock Exchange, were priced at $31 late Thursday. They rose as high as $38 yesterday before settling at $35.06.

Blackstone stock began trading on an electronic exchange before the shares officially opened yesterday.

Before the New York Stock Exchange gave the green light to trade the stock, the Alternative Display Facility, which reports trades executed by brokers, quoted trading in the private equity firm's shares.

Thinking the shares had opened, the electronic National Stock Exchange executed four trades of Blackstone's stock totaling less than $100,000.

The Alternative Display Facility, which is operated by NASD, said some brokers began trading before the stock opened and reported those trades through ADF.

A National Stock Exchange spokeswoman said the trades were canceled upon the realization they were executed too early.

Even for an industry that is accustomed to monstrous paychecks, yesterday's offering enriched Blackstone's founders on a an amazing scale. Stephen A. Schwarzman, with a 24 percent stake in the company, saw the value of his holdings rise by about $1 billion - to $9 billion - in yesterday's trading.

For all the hoopla, however, Blackstone will now face some of its toughest challenges.

The biggest will be maintaining the impressive earnings and investment returns that have enthralled shareholders.

Even private equity executives concede that the salutary market conditions that have fed their success can't last. Private equity shops borrow heavily to goose their investment returns. But interest rates have climbed sharply this year.

Blackstone also will have to acclimate itself to the glare of shareholder scrutiny.

The cyclical nature of their business - it's easier to sell companies and book profits when the stock market is rising - can result in jagged quarterly and annual earnings that could make its stock volatile.

"It's like the Hollywood hit business," said Francis Gaskins, editor of research firm "You're OK if you have a string of hits, but then if you stop it's over."

Blackstone has drawn far more attention than Fortress Investment Group, the only other publicly held "alternative-asset" manager, which did an IPO in February. Its shares fell $1.63 Friday, to $24.25, after closing above $33 in April.

Schwarzman's mammoth compensation and his high profile - Rod Stewart performed at his opulent 60th birthday bash earlier this year - has helped Blackstone hug the spotlight.

Perhaps sensitive to its notoriety, Blackstone officials did not ring the opening bell at the NYSE yesterday morning, as is customary for a big public offering. A Blackstone spokesman could not be reached for comment.

Buyout titan Kohlberg Kravis Roberts & Co. is reportedly considering its own IPO later this year, but one hurdle to other firms may be a nascent effort in Congress to boost private equity taxes.

Two senators have proposed taxing the firms as corporations rather than as partnerships, which could bump their tax rates to about 35 percent from 15 percent.

Other firms contemplating IPOs might rush to do so under a Republican administration, which would be less inclined to raise the industry's taxes, experts say.

"The public attention and the attention Congress given to Blackstone has turned it into a symbol for what's to come, and that will be a plethora of filings from hedge funds and private equity managers," predicted Steven R. Howard, head of the private equity practice at law firm Thacher Proffitt & Wood.

Walter Hamilton writes for the Los Angeles Times. The Associated Press contributed to this article.

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