The Blackstone Group

The Blackstone Group’s decision to file an initial public offering (IPO) involved the development of the compensation system, protection of the limited partners (LP), structure of the public ownership, and an accounting transition in order to alleviate problems that would arise. Blackstone was required to establish a new compensation package that addressed partners carried interests as well as compensation for investment professionals and staff members that allowed each party to be no worse off than they were before. In a solution to this problem a dynamic vesting structure was to be implemented that was unique to each business line. Additionally, Blackstone prevented the dilution of the LPs by offering a 10 percent stake in a general partner, therefore protecting the LP investments. Furthermore, through the use of a Master of Limited Partnership structure Blackstone was able to maintain their governance structure and maximize the LP’s interests. As the firm only conducted its accounting on a tax basis with different financials for each business line it would need to create firm-wide GAAP-compliant statements. In the process of creating compliant statements Blackstone would be required to incur a $17 billion future noncash charge (value of vesting shares issued to the firm’s existing owners and equity to employees) to their earnings. As a result Blackstone curbed this issue with the development of a metric called “economic net income” which showed portrays a more accurate earnings report excluding charges related to vesting shares.
Traditionally, the relationship between GPs and LPs in private equity had been sensitive to a fund’s governance and incentive structures. Here, the private structure of such funds allowed for properly aligned incentives between these two parties, mainly in the form of carried interest. Carried interest for the GPs assured the LPs that management had significant skin-in-the-game and would not neglect their duties. However