The Blackstone IPO and the dawning of the age of partnership

The Blackstone IPO will surely be getting a lot of attention on a lot of fronts. There will be a lot of talk about the 2.2 billion net revenues.  Others will emphasize the sweet irony of the rescuer of firms from public markets and SOX jumping into those markets itself and moaning all over its prospectus about the risks of SOX 404. 

For me the most fascinating part of all this is that the new publicly owned entity really will be, as it says, a “different kind of public company” – it’s a partnership. I'm going to have more to say about all this over the next couple of weeks, but here's a few quick observations.

Until now, publicly held, or “master” limited partnerships have been consigned to pipelines and other types of passive resource management in order to get the benefits of flowthrough partnership taxation under IRC 7704. Blackstone is challenging that model by trying to squeeze an asset management company under the qualifying income part of 7704. Here's a discussion of that point.

Whether or not this sort of “privlic” firm is the wave of the future, the offering document gives us a glimpse into the broader phenomenon that I think will be the future -- partnership control of formerly public operating companies.

The prospectus clearly lays out the stark difference between this firm and a corporation. Not only do the limited partners have very little power – we’ve already seen that in dual class corporations like Google and the New York Times – but the managers have weak fiduciary duties as well. (Here’s an analysis of the limited partners’ fiduciary rights in Delaware limited partnerships. ) Owners trade both governance and fiduciary rights for what really matters – a promise of regular distributions coupled with high-powered financial incentives of the managers. 

I predicted long ago that the broad waiver provisions in the Delaware limited partnership act effectively created contractibility of those rights in Delaware corporations. See my Unlimited Contracting in the Delaware Limited Partnership and its Implications for Corporate Law, 17 Journal of Corporation Law 299 (1991). I went wrong in thinking that public corporations would simply disincorporate into Delaware limited partnerships -- I underestimated the powerful hold of the corporate form for publicly held firms given 7704. Since Blackstone is seeking that shelter, albeit in a novel way, we still don't have a clear break with the corporate past for publicly held firms. 

I don’t know exactly where we’re headed, but we’re clearly not just stuck in the corporate rut. Control of firms is shifting to partnership-type vehicles, whether privately held or the Blackstone “privlic” variety. Keep in mind that Blackstone controlled $80 billion before offering a puny little $4 billion slice.  If Blackstone has found a gaping loophole in 7704, then the field will open up even more. 

I frankly doubt that the private equity model will work with public equity, but who knows? My point remains: even if this is a one off deal, the age of partnership is upon us, and the Blackstone S-1 shows us what that means.