In an article profiling Stephen Schwarzman that appeared on the front page of the Wall Street Journal just days before Blackstone's initial public offering, the firm's co-founder is quoted as saying his preferred strategy is to “kill off” those who stand in his way, and to “inflict pain” on rivals. It also detailed some aspects of Schwarzman's high-net-worth private life.
It was the kind of quite-period exposure that causes legal counsel to become ashen with fear. In fact, the Securities and Exchange Commission was apparently not pleased with the timing of the article, and Blackstone took the unusual step of submitting it as a Form FWP along with its other filings. It may be the first time that a company has disclosed to potential investors the price-per-crab-claw paid by a senior director.
The article was also perhaps the least formidable in a string of obstacles that Blackstone plowed through on the way to its June 22 New York Stock Exchange listing. In the weeks after the firm revealed its IPO plans, it became clear that what in most other cases is a routine capital markets event had in Blackstone's case become a lightning rod for all manner of political and social agendas. One by one, concerned parties stepped forward to demand a halt to the Blackstone IPO, to steal its thunder, or to otherwise make life difficult.
Consider this timeline:
May 15: The AFL-CIO – the largest federations of trade unions in the US – sends a letter to the SEC decrying the Blackstone IPO as serving “no practical purpose aside from creating a mechanism for Blackstone Group to sell its shares to the public without being regulated by the Commission”. The letter was a reference to Blackstone's impending status as a publicly traded partnership, and as such relying on certain exceptions related to corporate governance. Trade unions generally view private equity and hedge funds as forces inimical to the growth of organised labour, and the letter to the SEC is yet another attempt by union leaders to find the right footing in this match.
June 14: Max Baucus and Chuck Grassley, leaders of the Senate Finance Committee, reveal a bill that would prevent Blackstone and any other firm with public aspirations from claiming a key tax exemption. The senators accuse Blackstone of “pretending to be something [it is] not” in claiming that more than 90 percent of the firm's income is “passive”, which in turn allows Blackstone to avoid being taxed as a corporation. The bill would disallow financial services providers from using this exemption as publicly traded partnerships. If made law, it would give Blackstone and similarly structured Fortress Investment Group a grace period of five years before they get the full corporate treatment. Every other alternative investment IPO gets the treatment starting now. Fortress' shares dropped roughly 10 percent on the news before surging back. Grassley, a self-declared foe of tax shenanigans, has since said that he might try to shorten Blackstone's five-year grace period.
June 21: Senator Jim Webb, a Democrat from Virginia, sends letters to the Department of Homeland Security, the Treasury and the SEC asking that Blackstone's IPO be delayed while a full review of China's $3 billion investment in the firm is undertaken. Webb cites “serious questions” about national security. Might sensitive technology owned by a Blackstone portfolio company somehow be transferred to the People's Republic of China by dint of its minority stake in the firm's management company? Webb would like to know.
June 22: On the very day of Blackstone's IPO, the chairmen of the House Ways and Means Committee and the House Finance Committee unveil a bill that aims to change to tax characterisation of GP carried interest from capital gains to ordinary income, which would more than double the tax rate on most carry.
It's hard to know why none of these items of bad news managed to put a dent in the IPO – Blackstone priced at the top of its expected range and close up 13 percent on its first day of trading. In the ill-timed WSJ profile, Schwarzman spoke of preferring a war to a series of scrimmages. Unfortunately, it appears that the private equity industry is facing protracted scrimmaging in Washington. Fortunately for Blackstone, it's won a decisive early battle with something of a fait accompli.