June 20 (Bloomberg) -- When Blackstone Group LP went public last June, Chairman Stephen Schwarzman said earnings might swing from quarter to quarter, so investors should plan to hold on to shares of the leveraged-buyout firm for ``a number of years.''

Within six weeks of the $4.1 billion initial public offering, the LBO boom Schwarzman epitomized stopped as the credit markets seized up along with the debt used to finance takeovers. While Schwarzman, 61, and co-founder Peter G. Peterson, 82, pocketed a combined $2.6 billion from the IPO, the stock has dropped 41 percent. None of the nine analysts in a Bloomberg survey who follow the New York-based company expect it to recover to the $31 IPO price in the next 12 months.

``For a Blackstone insider, that IPO was perfectly timed,'' said Ryan Lentell, an analyst at Morningstar Inc. in Chicago. ``For a common holder, the timing was the worst.''

The frenzy surrounding the share sale, which pushed the stock as high as $38 on June 22, the first day of trading, gave way to concern that the lack of loans for acquisitions would hurt profits. New accounting regulations that require private- equity firms to value holdings based on estimated market prices, rather than at cost, also hobbled the stock.

Blackstone closed yesterday at $18.40 in New York Stock Exchange composite trading, giving the 23-year-old company a market value of $19.9 billion.

IPO investors bought shares hoping for the same annual returns that clients in Blackstone's funds get, which range from more than 22 percent for private-equity deals to 31 percent for real-estate holdings.

Corporate Governance

``We're very proud that every product we've done has not only not lost money, but has been in the top quartile or even decile,'' Blackstone President Tony James, 57, said in a June 18 interview. ``The last thing we want is our own stock to be the exception to that.''

In the same IPO document that warned shareholders about earnings volatility, Blackstone said it's exempt from NYSE corporate governance rules, including those on board independence. The firm also isn't required to hold annual meetings for common holders and doesn't provide quarterly or annual profit forecasts.

``You will not have the same protections afforded to equity holders of entities that are subject to all of the corporate governance requirements of the New York Stock Exchange,'' according to the document.

Blackstone partners and employees collectively control more than 80 percent of the company. Jerry Jordan, who oversees more than $500 million at Hellman Jordan Management Co. in Boston, increased the stake held by his Jordan Opportunities Fund to 100,000 shares from 25,800 at the end of last year.

Blackstone vs. BlackRock

``I find it hard to believe that Blackstone's business will get worse,'' Jordan said.

China Investment Corp., the Chinese government's investment arm, was an initial shareholder in Blackstone after negotiating a 4.5 percent discount to the IPO price in exchange for promising not to sell the stake for four years. Its 9.4 percent holding is worth $1.86 billion.

``We're value investors and see Blackstone as a long-term investment,'' said Bai Xiaoqing, a spokeswoman for the sovereign wealth fund in Beijing.

Comparisons with the performance of other financial institutions show the extent of Blackstone's decline. One year after its IPO in 1999, New York-based fund manager BlackRock Inc. -- which was spun off from Blackstone -- more than doubled. Its market capitalization today is $24.3 billion.

Goldman Sachs Group Inc., the biggest U.S. securities firm by market value, gained 72 percent in its first year and Morgan Stanley, the second-largest, rose 12 percent.

Slumping IPO Market

Legg Mason Inc., the Baltimore-based money manager, dropped 50 percent after its 1983 debut, data compiled by Bloomberg show. Fortress Investment Group LLC, the New York-based buyout- and hedge-fund manager that went public four months before Blackstone, is down 32 percent from its $18.50 offering price.

While Schwarzman told an investment conference last month that the worst of the credit shortage may be over, investors are concerned a recession will make it harder to pay off LBO debt. A weak IPO market also may limit Blackstone's ability to sell companies to the public at a profit.

IPOs worldwide dropped 34 percent in dollar terms as of June 18 from a year earlier, according to Bloomberg data. Excluding the $19.7 billion offering by Visa Inc., the world's largest credit-card network, the gap widens to 52 percent.

What's It Worth?

Investors are struggling with how to value Blackstone. The company has said it will report net losses for its first five years because of compensation costs tied to the IPO. Blackstone's pro forma profits and losses swing wildly because they are tied to when it sells its holdings, as well as the market value it must put on investments even if it has no plans to sell them.

``We're not a normal company,'' James said. ``With any normal business, how I do this quarter tells where the business is trending.''

That lack of normalcy makes comparisons difficult. The company trades at more than 30 times estimated earnings, while Goldman Sachs and Fortress trade below 15 times.

``Right now it's not clear what the cash flow to shareholders really looks like and how they realize it,'' said Colin Blaydon, the director of the Center for Private Equity and Entrepreneurship at Dartmouth College's Tuck School of Business in Hanover, New Hampshire. ``There's a lot of uncertainty about the returns for the big investments and what the prospects are going forward.''

Hedge Funds

Analysts' price targets for the stock range from $19 to $30. Part of the challenge comes in valuing the holdings because there is no immediate public market for the companies that firms like Blackstone specialize in buying and selling.

``When you're buying a private-equity stock you are really purchasing the intellectual capital of the investment committee,'' said Jackson Turner, an analyst at Argus Research in New York, who recommends clients buy Blackstone shares. ``If you don't have faith in the management, you shouldn't be investing in them. People have less faith now and that's part of the problem.''

Schwarzman and James used cash and stock earlier this year to buy GSO Capital Partners LP, a hedge-fund firm specializing in distressed debt. The acquisition has helped Blackstone diversify beyond private equity. Hedge funds and funds of hedge funds now make up Blackstone's biggest business by assets under management.

``We went public to build the firm,'' James said. ``We could only do that if we had access to capital and a currency.''

KKR to Carlyle

With the world's biggest banks and securities firms having cut 83,000 jobs since July, Blackstone also is using its stock as a recruiting tool. The firm hired Laurence Tosi, 40, from New York-based Merrill Lynch & Co., the third-biggest U.S. securities firm, earlier this month as its new chief financial officer. Part of Tosi's compensation is an equity bonus valued at $4.5 million.

Its own executives have incentive to stay. Most won't be able to sell all of their shares from the offering until 2016.

While Schwarzman's competitors might not envy his share price, they may still go public to gain stock to finance acquisitions and compensate employees. Kohlberg Kravis Roberts & Co. filed for its IPO last July and the New York-based firm's registration remains active.

Apollo Management LP, the New York-based firm led by Leon Black, sold shares privately and plans to convert some of them to a public listing on the NYSE. David Rubenstein, co-founder of Washington-based Carlyle Group, has said he expects the six or eight biggest LBO firms, including his, to eventually seek IPOs.

``They still have the appetite and the motivation for doing it,'' Dartmouth's Blaydon said. ``The recent performance has just made everyone be cautious.''

To contact the reporters on this story: Jason Kelly in New York at jkelly14@bloomberg.net; Jonathan Keehner in New York at jkeehner@bloomberg.net

Last Updated: June 20, 2008 00:01 EDT