blackstone IPO
Q1. What are the built-in tensions with a public private equity firm? How does Blackstone 's structure attempt to reconcile them?
1. Transparency (disclosures of financial statements)
The reason why investors are willing to let the required rate of return decrease is the lower concerns about asymmetric information due to the disclosures of financial statements. In the past, in order not to be subjected to Investment Company Act of 1940, Blackstone once analyzed its operations and concluded that it was not an investment company. The SEC subsequently reviewed the conclusions and did not object. However, if it goes public, it will face problems such as its financial reporting, which should compliant with the GAAP. Therefore, Blackstone hired Jasvinder Khaira and tried to consider the business scope and to create the best business model. Nevertheless, we think that as an IPO company, Blackstone must fully disclose its financial statements and it is also the must-pay and tradeoff to lower the costs of capital. This is also the problem that Blackstone couldn 't wholly resolve from purely adjusting the financial structure.
2. Risk of employees resigning triggered from the change of compensation package Before going IPO, underwriters raised the concerns from unitholders: ‘though it will bring benefits to the existing LPs as the managing of closed deals from employees, it may also let them neglect the growth of company from developing new deals.’ Part of carried interests, as proposing closed deals, should be converted into units and withdraw in the coming eight years. As a result, the benefits of both unitholders and employees can be adjusted into the same direction. However, the lock-up eight years of the units will face the volatility risk of stock price, which will also trigger the possibility of resigning trend. Therefore, the management team came up with the idea that the other part of closed deals should be converted into unpaid carried interests, which can
1. Transparency (disclosures of financial statements)
The reason why investors are willing to let the required rate of return decrease is the lower concerns about asymmetric information due to the disclosures of financial statements. In the past, in order not to be subjected to Investment Company Act of 1940, Blackstone once analyzed its operations and concluded that it was not an investment company. The SEC subsequently reviewed the conclusions and did not object. However, if it goes public, it will face problems such as its financial reporting, which should compliant with the GAAP. Therefore, Blackstone hired Jasvinder Khaira and tried to consider the business scope and to create the best business model. Nevertheless, we think that as an IPO company, Blackstone must fully disclose its financial statements and it is also the must-pay and tradeoff to lower the costs of capital. This is also the problem that Blackstone couldn 't wholly resolve from purely adjusting the financial structure.
2. Risk of employees resigning triggered from the change of compensation package Before going IPO, underwriters raised the concerns from unitholders: ‘though it will bring benefits to the existing LPs as the managing of closed deals from employees, it may also let them neglect the growth of company from developing new deals.’ Part of carried interests, as proposing closed deals, should be converted into units and withdraw in the coming eight years. As a result, the benefits of both unitholders and employees can be adjusted into the same direction. However, the lock-up eight years of the units will face the volatility risk of stock price, which will also trigger the possibility of resigning trend. Therefore, the management team came up with the idea that the other part of closed deals should be converted into unpaid carried interests, which can