Blackstone Group: Act 1, Scene 1

The Blackstone Group's debut as a publicly traded company may be the best drama on Wall Street since the movie Wall Street.

There's political intrigue: A day before Blackstone's initial public offering on June 22, some lawmakers tried to persuade regulators to stymie the IPO. Others have made noises about raising taxes on private-equity firms, such as Blackstone, that go public.

There's a foreign angle involving a still nominally communist nation: The Chinese government separately invested $3 billion in Blackstone.

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There are bitter rivalries: Blackstone's arch-nemesis, Kohlberg Kravis Roberts, wants to go public.

And there's class warfare: The Wall Street Journal revealed that Blackstone chief executive Stephen Schwarzman enjoys weekend feasts on $400 stone crabs, throws himself lavish birthday parties, and hates it when the help wears squeaky shoes around the pool of his Palm Beach mansion.

What's not to love about this soap opera?

The Blackstone IPO produced plenty of fireworks. The stock (symbol BX) gained 13% from the IPO price of $31.00 to close at $35.06. The leap came on a day when the Dow industrials tumbled 1.4%.

Although many offerings experience big first-day pops, Blackstone is not your typical IPO. It's the largest offering in five years and the sixth-richest in U.S. history. The deal values the company at about $34 billion (with the first day jump, the market now values Blackstone at $38 billion). For comparison, that's roughly $16 billion more than the market capitalization of Bear Stearns and more than a third the size of Goldman Sachs. On the other hand, Blackstone shares did not fare as well as those from private-equity firm Fortress Investment Group (FIG). It gained 67% on its first trading day, in February.

Using large amounts of borrowed money, private-equity firms try to buy underperforming companies, turn them around and sell them at a profit. In 2003, private-equity firms raised about $28 billion in equity capital for buyout funds, according to the newsletter Private Equity Analyst. Last year, that figure reached $176 billion.

Blackstone's edge over competitors is its reputation and deal-making skills, says Steven Samson, manager of Listed Private Equity Plus fund, which invests in publicly traded private-equity firms. "These are the best investors in the world," Samson says. "And they are investing in these companies for the right reasons, because they believe they can make them stronger entities."

As of May 1, Blackstone had significant investments in 43 private companies, managed about $20 billion in real estate interests and ran about $35 billion in hedge funds. It posted a $2.3 billion net profit last year and a $1.1 billion net profit in the first quarter 2007.

One concern for investors in Blackstone's shares is that the company is starting to attract attention on Capitol Hill. Congress is considering raising the tax rate on investment partnerships such as Blackstone from 15% to 35%. "That would have a material impact on earnings and subsequently the stock's valuation," says Phil Stiller, an IPO analyst with Renaissance Capital. "It's unclear if it will happen and when it will take effect. So it's something that investors should pay close attention to."

Despite the first-day rise, Blackstone shares seem reasonably priced. According to the Wall Street Journal, some investors have been told that the company expects to earn $1.75 a share in 2008, which means the stock trades at 20 times those expectations. That's not a pie-in-the-sky valuation, especially given Blackstone's 22-year investing record and the industry's growth prospects.

But until the dust settles from the IPO and we get a glimpse of how Blackstone will behave as a public company, you would be better served to be a spectator in this drama rather than a bit player.