China tied to Blackstone for seven years

Fresh details have emerged in Blackstone’s latest pre-IPO filing with the US Securities and Exchange Commission about the long-term nature of its deal with China’s overseas investment vehicle.

The Blackstone Group has revealed in its updated pre-IPO filing with the US Securities and Exchange Commission that China will have to hold at least a third of its $3 billion investment in the firm’s management company for seven years.

Blackstone has locked in the entire investment by China’s overseas investment company, which is buying almost 10 percent of the firm, for four years, according to the original statement.

However, in the latest S-1 filing, submitted Monday, Blackstone said: “After such four-year period, the State Investment Company may sell up to one third of its common units over each of the subsequent three years and we have agreed to provide it with registration rights to effect such sales.”

In effect it compels the Chinese to hold at least a third of its investment in Blackstone for seven years irrespective of the share’s performance in the market, protecting the firm from such a large investor dumping the stock and increasing volatility.

Blackstone has agreed that the Chinese government would receive its non-voting units at a 4.5 percent discount to the price set in the public offering this summer. The deal will close concurrently with the completion of the IPO.

However, in the same filing the firm has dropped its plans to use an innovative accounting method which would have allowed it to book profits at the time it did a deal, rather than waiting for the exit. This would have helped smooth earnings and ease potential volatility.

The decision to revert to a more conservative approach will dent the group’s pro forma earnings last year by 22 percent or $595 million (€440 million) in advance of its $34 bilion float, according to Blackstone’s calculations.

Blackstone had intended to adopt the recently developed voluntary accounting standard SFAS 159 for its IPO. This would have allowed the buyout firm to treat carried interest as an option which could have been bought or sold individually. It now plans to value “carry” every quarter as if the firm’s funds have closed.

Blackstone said it is “currently evaluating the potential effect on our combined financial statements of adopting SFAS 159.”  

People familiar with the IPO told the UK newspaper Financial Times that investment bank analysts believed the accountancy measures were too complicated.

In another filing the firm said it had appointed as directors the former Canadian prime minister Brian Mulroney, British financier Nathaniel Rothschild and former chief executive of accountant Deloitte Touche Tohmatsu, William Parrett.

The filings also said there are 60 senior managing directors at the firm up from 57. 

The Blackstone Group declined to comment. The filings are available online here.

Additional reporting by Toby Lewis