Academic journal article Albany Law Review

After the Storm: Unmasking Publicly-Traded Private Equity Firms to Create Value through Shareholder Democracy

Academic journal article Albany Law Review

After the Storm: Unmasking Publicly-Traded Private Equity Firms to Create Value through Shareholder Democracy

Article excerpt


On June 21, 2007, The Blackstone Group L.P. ("Blackstone"), a prominent private equity firm, conducted its initial public offering ("IPO") of 133.3 million shares of "common units representing limited partner interests," raising $4.133 billion from public investors. (1) Within two weeks of Blackstone's IPO, Kohlberg, Kravis, Roberts & Co. L.P. CKKR"), another reputable private equity firm, filed a registration statement with the U.S. Securities and Exchange Commission CSEC"), intending to raise cash from the public markets. (2)

Investment banks and journalists reacted in an overwhelmingly positive way to Blackstone's IPO. Wall Street analysts "positively gushed" over the prospect of Blackstone trading publicly; the strength of its portfolio holdings makes the firm a great investment. (3) "Wall Street firms rushed in to advise investors to buy, buy, buy ... [as] most of the underwriters came out with positive ratings." (4) Analysts in particular noted Blackstone's ability to remain profitable even during down markets. (5) With a stellar reputation and analyst praise, the IPO may have a far-reaching impact on an industry thrust in the spotlight.

Private equity firms, defined and discussed in Part II of this comment, play an important role in business today. They can purchase stock in public companies, take a public company private, or take ownership positions in privately-held companies. Whereas private equity firms change management and operations to maximize value in portfolio companies, hedge funds are trading-oriented. (6) Private equity firms are commonly organized as partnerships (7) and, as such, traditionally have only had to answer to few outsiders. The firms are typically flush with cash, whether it is their own or borrowed from other sources.

The Blackstone IPO provides a window of opportunity to observe the malleability of a private equity firm as it attempts to develop a relationship with new public owners and comply with demanding regulation. For instance, the SEC requires that publicly-traded companies disclose information that they otherwise would not need to as private entities. (8) Private equity firms are secretive about the way they do business--in an aggressive industry, specific business decisions are understandably "competitively sensitive." (9) Part III, describes some unique challenges Blackstone, as a public company, must face as it navigates uncharted waters.

On the other hand, a firm in this industry cannot underestimate the benefits of seeking public ownership. A publicly-traded company has the chance to gain access to greater pools of capital from the investing public and consequently reduce reliance on borrowed funds. Decentralized decision-making for the benefit of new limited partners and disclosure of information pertinent to their investments can create value for post-IPO firms. Part IV presents Professor Lucian Bebchuk's theoretical approach and Professor Gompers's empirical approach, which both demonstrate that adoption of shareholder democracy principles by a post-IPO private equity firm can create value. Part V shows that private equity firms such as Blackstone and KKR do not intend to implement shareholder democracy concepts, as evidenced by their respective registration statements. This stance does not, however, foreclose them from the opportunity to do so.

Part VI compares the management styles and disclosure policies of Blackstone and KKR, on the one hand, with Google Inc. ("Google"), on the other, to show that shareholder-driven governance mechanisms can be effective. Finally, this comment concludes that private equity firms which choose to conduct ah IPO should implement shareholder democracy--which, for the purpose of this paper is a function of shareholders' access to information and power to make decisions--and realize that doing so will likely have a positive effect toward maximizing both firm value and shareholder wealth. …

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