Sloan: Blackstone Is Hiding Its Private Parts

What a letdown. Blackstone Group, the giant "private" equity firm, finally filed its going-public documents last week—but left out what Wall Street's financial voyeurs most wanted to see: how much of the firm cofounders Steve Schwarzman and Pete Peterson own, what their stakes might be worth and how much they and their partners have been paying themselves. It was like watching "Sex and the City" on basic cable: the good stuff's gone missing. Bummer.

But this disappointment notwithstanding, there is news buried in Blackstone's 300-plus-page filing, like truffles hidden on a forest floor. The most interesting single revelation involves how much Blackstone made last year in "carry": the portion (typically 20 percent) of investors' profits the firm gets as a fee. The carry, buried on Page F-29, some 250 pages into the filing, is a stunning $1.55 billion, more than two thirds of Blackstone's $2.3 billion of "economic net income." Now watch. Blackstone's partners, like those at other private-equity and hedge-fund outfits, apparently treat this "carry income" as capital gains taxed at a 15 percent federal rate rather than as ordinary income that would be taxed at 35 percent. The IRS and the Senate Finance Committee are making a fuss over this tax break for the mega-rich, but it's not clear if anything will come of it.

Blackstone declined to comment on any aspect of its offering because it's in registration at the Securities and Exchange Commission. But the document speaks for itself. It's full of little nuggets, and informed by more than a tinge of arrogance. Let's start with the concept of "fiduciary duty," which means putting the interests of others ahead of your own. This obligation is the cornerstone of running a publicly traded company. But get this. Blackstone warns potential investors that its partnership agreement "reduces or eliminates the duties (including fiduciary duties) owed ... to our common unitholders." Translation: you ante up your money, you get to ride along with us, sort of, but you have essentially no rights.

When you come right down to it, this whole thing's a hoot. Blackstone, which for 20 years has talked up the joys of converting public companies into private ones, is itself converting from a private company into a public one. To its credit, Blackstone actually addresses this point, saying that it will be "a different kind of public company." It won't provide "earnings guidance" to Wall Street, it will avoid focusing on quarterly earnings, yadda yadda yadda. So why is Blackstone going public? The filing makes it crystal-clear. It's a bull market for private equity, Blackstone's good at timing, and it would rather use public investors' money than its partners' money to pay down its debt ($340 million at the year-end), expand and allow some of its partners to cash out.

Blackstone is taking its management company public; the companies that it's taken private in deals like Equity Office Properties aren't part of this offering. It's selling public investors units in a partnership rather than shares of a corporation. Why? I think because unlike a manufacturing company or a trading outfit like its rival Goldman Sachs, Blackstone doesn't need to pile up permanent capital. Instead, it will pay out to unitholders most of the cash that its operations generate. And being a partnership rather than a corporation is tax-efficient. Corporations pay corporate tax and then distribute dividends from after-tax profits to shareholders, some of whom pay tax on them. At Blackstone, there will be just one level of taxation: a unitholder's proportionate share of the profits.

This structure helps explain one of the most-hyped aspects of this offering: that chief executive Schwarzman will content himself with a mere $350,000-a-year salary. By my reading of the filing, he'll get more than $300 million a year of the cash Blackstone is likely to distribute. With that kind of continuing income, who needs salary?

A final touch. Blackstone says that after it goes public, its unitholders should count on seeking a filing extension from the IRS each year. Why? Because Blackstone won't get tax information to them in time for an April 15 filing. This nugget is on page 55, the last of 31 pages of "risk factors" Blackstone warns about. All that seems to be missing is a warning against operating heavy machinery after investing, and keeping this document out of the reach of children.

Okay. Should you buy into this action? There's no way to tell, because Blackstone hasn't given us the information we need for a decent financial analysis. Blackstone will probably open its kimono a bit in subsequent filings. But we're unlikely to see anything as explicit as Carrie Bradshaw and her pals once were. Too bad.