June 22 (Bloomberg) -- Blackstone Group LP, abandoning 22 years of private ownership, now faces increasing scrutiny from U.S. and British lawmakers who want the buyout firm to pay more taxes.

Blackstone shares jumped 13 percent to $35.16 on their first day of trading after the New York-based firm raised $4.13 billion in the biggest U.S. initial public offering in five years. The company sold 133.3 million units for $31 each yesterday, the top of the range used to market the securities. The gain gave Blackstone a market value of $38.1 billion.

``Investors are very eager to get involved in this deal,'' said Michael Malone, trading analyst at Cowen Group Inc. in New York. ``You're seeing strong demand.''

Blackstone will use the money to expand its buyout and asset-management units, and pay founders Stephen Schwarzman and Peter G. Peterson $2.33 billion. While enriching themselves, the executives also are trying to keep the benefits of a private partnership, including paying a 15 percent U.S. tax rate instead of the 35 percent corporate levy. Legislators in Washington and London have proposed raising taxes for private-equity firms.

The success of Blackstone's IPO -- the biggest on a U.S. exchange since the $4.87 billion sale by CIT Group Inc., the country's largest independent commercial finance company, in 2002 -- may lure other leveraged buyout firms.

Apollo to KKR

Leon Black, the 55-year-old founder of Apollo Management LP, said April 24 at the Milken Institute Global Conference in Beverly Hills, California, that his New York-based buyout firm was examining an IPO.

Kohlberg Kravis Roberts & Co. co-founder Henry Kravis, 63, told investors at a conference in California that his company is considering an initial share sale, the London-based Times newspaper said May 26.

KKR, after announcing $120 billion of LBOs this year, has hired investment bankers to help prepare an IPO, said a person familiar with the New York-based firm who declined to be identified because he isn't authorized to speak for the company. CNBC reported yesterday that KKR hired Morgan Stanley and Citigroup Inc., without saying where it got the information.

KKR spokesman David Lilly declined to comment, as did Morgan Stanley spokeswoman Marie Ali and Stephen Cohen, a Citigroup spokesman. Both firms are in New York.

Blackstone's Earnings

Blackstone's profit more than doubled in the first quarter to $1.13 billion, 15 percent less than the firm made in all of 2005, according to the company's filings with the U.S. Securities and Exchange Commission. The company has spent almost $200 billion acquiring companies since 1987.

The IPO valued Blackstone at about 12.6 times its 2006 profit of $2.66 billion. Fortress Investment Group LLC, based in New York, was the first U.S. manager of hedge funds and private equity to sell a stake to investors, raising more than $634 million in February. Its shares have risen 31 percent and trade at 22 times 2006 earnings.

``People see it as a referendum on the market and how private equity is doing,'' Quincy Krosby, who helps manage $330 billion as chief investment strategist at The Hartford in Hartford, Connecticut, said of the IPO.

Tax Rule

Blackstone, the owner of companies with about 375,000 employees and $83 billion in annual sales, may wind up raising as much as $7.75 billion. Underwriters have the option to increase the sale of 133.3 million units by 20 percent and China's soon-to-be-formed State Investment Co. will buy $3 billion of nonvoting stock, or 9.4 percent.

The company's market value is less than half of the $96.8 billion capitalization of Goldman Sachs Group Inc., the world's No. 1 securities firm by profits and market valuation. It tops New York-based Bear Stearns Cos., whose shares are valued at $20.8 billion.

Schwarzman and Peterson, who founded Blackstone in 1985 with $400,000 after leaving Lehman Brothers Holdings Inc., say their firm won't behave like a typical publicly traded company. The units sold in the IPO don't carry limited voting rights, so partners will make all the decisions, according to the offering prospectus filed with the SEC.

Blackstone plans to take advantage of a 20-year-old tax rule that allows investors in publicly traded partnerships to pay capital-gains tax on their share of income, instead of the higher corporation tax.

Schwarzman Stake

The combination of the growing profits and the tax advantages made private-equity firms a target for lawmakers seeking higher government revenue. Private-equity firms spent $535 billion on acquisitions so far this year, on track to eclipse last year's record $701.5 billion before the end of the third quarter, according to data compiled by Bloomberg.

Schwarzman, Blackstone's 60-year-old chief executive officer, planned to sell about 5.7 percent of his stake for $449.2 million, according to a June 21 filing with the SEC. His remaining shares would be valued at as much as $7.74 billion.

Peterson, 81, the firm's chairman, intended to sell about 59 percent of his shares for $1.88 billion and would own 4 percent of the firm after the IPO, the June 21 filing shows. The former Federal Reserve Bank of New York chairman and U.S. Secretary of Commerce plans to retire next year.

Senate Finance Committee Chairman Max Baucus, a Montana Democrat, and Iowa Senator Charles Grassley, the panel's ranking Republican, proposed legislation last week that would more than double the tax rate for publicly traded buyout firms by forcing them to organize as corporations by 2012.

Rising Yields

``Right now, some businesses are crossing the line between reasonably lowering their tax burdens and pretending to be something they're not to avoid most, if not all, corporate taxes,'' Grassley said June 15.

A House bill introduced June 20 by Representative Peter Welch, a Vermont Democrat, would require Blackstone to begin paying taxes at the corporate rate of as much as 35 percent immediately after going public.

British Prime Minister Tony Blair promised a review of how private-equity firms are taxed amid growing complaints from labor unions and lawmakers within his own party that top bankers are paying less than other taxpayers.

``You're proud you're paying less tax than your cleaner,'' Labour Party lawmaker Angela Eagle told dealmakers from Washington-based Carlyle Group, KKR and London-based Permira Advisers LLP, as they gave evidence to a parliamentary panel on June 20. ``Don't you agree it's embarrassing?''

`Cyclical Industry'

Leveraged buyouts firms, which use a mix of cash from investors, their own funds and debt secured on the target they buy to pay for deals, are facing higher financing costs as yields on government bonds increase. The yield on the benchmark 4 1/2 percent Treasury note due May 2017 rose to 5.13 percent today, near the highest since July.

The high-yield, high-risk bonds that buyout firms typically use to finance their LBOs yielded 7.86 percent on average last week, up from this year's low of 7.58 percent in February, according to Merrill Lynch & Co. index data.

``Everyone knows this is a cyclical industry,'' said Colin Blaydon, director of the Center for Private Equity and Entrepreneurship at Dartmouth College's Tuck School of Business in Hanover, New Hampshire. ``Everyone expects, including the people at Blackstone, we're going to go through a cycle, and go down. No one knows when.''

Blackstone manages $88.4 billion, including $19.6 billion in its most recent buyout fund, the second largest after the $20 billion pool run by New York-based Goldman.

To contact the reporters on this story: Edward Evans in London at at eevans3@bloomberg.net; Jason Kelly in New York at jkelly14@bloomberg.net

Last Updated: June 22, 2007 16:07 EDT