Are The Hedge Funds Coming In? Blackstone’s IPO Filing
First the SEC tried to make them register. Suit was brought and they won, the SEC lost. The U.S. Court of Appeals for the District of Columbia struck down the efforts of the SEC to directly regulate hedge funds last summer. Goldstein v. SEC, 451 F. 3d 873 (D.C.Cir. 2006). Then SEC Chairman Cox vowed before congress that “hedge funds are not, should not be, and will not be unregulated.” www.sec.gov/news/testimony/2006/ts07250cc.htm Subsequently, the SEC proposed rules focused on hedge funds. Proposed Rule 206(4)-8 would prohibit investment advisors from making false statements to investors. Proposed Rules 509 and 216 would require accredited investors to have at least $2.5 million in investments — that is, it limits the class of persons who can purchase shares in the private placements used by the funds which are exempt from the registration requirements of the federal securities laws. www.sec.gov/rules/proposed/2006/33-33-8766.pdf The SEC also continues to bring enforcement actions against hedge funds using primarily the antifraud provisions of the federal securities laws. See, e.g., SEC v. Langley Partners, L.LC. et al., (D.D.C. March 14, 2006), www.sec.gov/litigation/litreleases/lr19607.htm (settled enforcement action which alleged insider trading and sale of unregistered securities regarding 23 PIPE offerings); SEC v. Deephaven Capital Management, LLC., et al., (D.D.C. May 2, 2006), www.sec.gov/litigation/litreleases/2006/lr19683.htm (settled enforcement action which alleged insider trading in connection with 19 PIPE offerings). This could be viewed as regulation by consent decree. Now however we have role reversal. Yesterday huge private equity firm Blackstone made landmark IPO filing with the SEC. Blackstone, founded by Pete Peterson in 1985, reportedly has about $78.7 billion in assets under management of which $31.1 billion are from its private equity business, $17.7 billion are in its real estate division and another $29.9 billion in its alternative assets unit. Blackstone reportedly posted $1.1 billion in revenue in 2006 with net income of $2.3 billion. The IPO would seek to raise as much as much as $4 billion through a public offering.
While the Blackstone filing is clearly significant, it is not the first. Earlier this year U.S. Fortress sold shares in an IPO. The February IPO raised $634 million for the firm. What is perhaps more significant however is that the shares from the IPO opened up 89% on the first day of trading. That kind of dramatic share price increase is reminiscent of the boom in the late 1990s and suggests significant public interest and appetite for hedge fund shares. So as regulators in Washington continue to debate the need for regulation of these huge market players, if the actions of Blackstone are any indication it may be that we will see more funds coming in to the market like Blackstone.