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Tickers in this Article: FIG, MS, C
Last month's surprise announcement that the Blackstone Group, one of the world's largest private equity firms, would be going ahead with an initial public offering of approximately 10% of the company will probably generate a considerable degree of investor interest.

Outstanding Track Record Keeps the Money Rolling In
The company has been a stand-out performer over the years, earning an average annual return of over 30% on its investments since it first opened shop back in the late 1980s. With solid performance numbers like that, it's small wonder that the company has now entered a league of its own in terms of the assets its manages and the deal-making power it now wields.

Assets under management now exceed $78 billion, invested in a mix of private equity, mezzanine, real estate and hedge funds. Recently, it had no trouble raising the necessary capital to close the largest private equity deal in history, the $36 billion buyout of Equity Office Properties Trust. With this much money at its disposal, it's little wonder the company's net income jumped by 70% last year to over $2.3 billion.

Market Interest Confirmed by the Fortress Offering
So, with this kind of success firmly in hand, why would Blackstone elect to offer the rest of the mere mortals an opportunity to get on board its own private money train by going public?

Last February's groundbreaking IPO by another alternative investment management operation, Fortress Investment Group LLC (NYSE: FIG), demonstrated how hot the market is for this type of offering. Fortress shares gained nearly 68 cents in their first day of trading.

The opportunity to realize a similar return must have prompted Blackstone's management to vote in favor of taking their own plunge into the public market. This, despite now having to run their shop with a much greater degree of transparency in line with the stringent disclosure requirements imposed on public companies by the Sarbanes-Oxley Act. A key element to its success has been the "blackbox" nature of its investment style.

Deal Structure could Impact Appeal
While the final pricing of the deal will be the major determinant in the after-market performance of the offering, a number of other factors may temper investor enthusiasm, one of which is its actual structure.

Rather than selling shares in the company, Blackstone proposes to offer investors units in a master limited partnership (MLP). While this will help Blackstone maintain the "blackbox" nature of its dealings, unit holders will lack certain key rights that common shareholders take for granted. No annual meeting of unitholders will be required to vote on matters such as board composition and executive compensation. The MLP structure will even allow Blackstone to be exempt from certain rules of the New York Stock Exchange, where it intends to list the units for trading two months hence. (For more on this topic, read Knowing Your Rights As A Shareholder.)

Tax Break Hinge On Aggressive Interpretation of U.S. Tax Law
Another factor that could potentially dampen enthusiasm for the offering is its somewhat uncertain tax status. U.S. tax law allows a master limited partnerships to avoid paying the 35% corporate tax rate provided it distributes nearly all its profits to unit-holders, who in turn only pay a 15% capital-gains tax on that income.

To be eligible for this tax break, Blackstone must convince the IRS that it is primarily an asset management company, deriving at least 90% of its income from passive investments that generate interest, dividends and capital gains. But, does deal- making on the scale of the recently concluded Equity Office Properties transaction constitute a "passive" investment?

There's even a chance that Congress could step in at some point and close this tax loophole altogether.


The bottom line
After the huge gain realized by investors in the Fortress IPO, you can bet that lead underwriters Citigroup (NYSE: C) and Morgan Stanley (NYSE: MS) will be sharpening their pencils to come up with a pricier number for the Blackstone offering. That likelihood, combined with the structural and tax issues, will probably produce a somewhat more muted post-market reaction than was the case with Fortress.

Nevertheless, if you have the opportunity to get a piece of this deal, take it. The private-equity feeding frenzy that's been making headlines of late still has a room grow, so, hook one of the biggest sharks in the pool while you can.

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