June 26 (Bloomberg) -- Blackstone Group LP's shares dropped below their initial public offering price in the third day of trading amid investor concern that the leveraged buyout boom has peaked and earnings growth will slow.

The stock declined $1.69, or 5.2 percent, to $30.75 at 4:01 p.m. in New York Stock Exchange composite trading after dipping as low as $30.32. The New York-based firm sold 153.3 million shares to the public last week for $31 each, giving Blackstone a valuation based on earnings that was about 50 percent higher than Goldman Sachs Group Inc.'s.

Investors are worried that buyout firms won't be able to continue their record pace of acquisitions. Buyers of high-yield debt are demanding higher interest rates as they perceive leveraged buyouts may become riskier.

``Maybe private-equity firms have had their run and you're not going to get the returns that we saw before,'' Michael Nasto, senior trader at U.S. Global Investors Inc., which manages about $4.8 billion in San Antonio, said today in an interview.

Shares of New York-based Fortress Investment Group LLC, the first manager of private-equity and hedge funds to go public, dropped $1.11, or 4.8 percent, to $22.14, the lowest since its February IPO. They are up 20 percent from their initial price of $18.50 each.

Buyout firms have announced $538.1 billion of private- equity deals announced this year and at that pace will eclipse last year's record $701.5 billion by the end of the third quarter. As the firms raise money to fund the purchases, they're encountering skeptical investors.

Borrowed Money

Blackstone raised $4.75 billion in the largest U.S. IPO in five years. As part of the deal, the company sold 20 million shares yesterday, raising $620 million, including an additional $234 million for co-founder Stephen Schwarzman. Underwriters of the offering were led by Morgan Stanley and Citigroup Inc.

The company also sold $3 billion of stock to China's soon- to-be-formed State Investment Co. in a private placement at a 4.5 percent discount to the IPO price.

Based on last year's results, the company had a price-to- earnings ratio of about 15. New York-based Goldman Sachs, the world's largest securities firm by market value, has a ratio of 10. Blackstone's earnings rose 70 percent to $2.26 billion in 2006. Goldman's profit increased to $9.54 billion, a 69 percent gain.

Fortress, whose profit more than doubled to $442.9 million last year, trades at 22 times earnings.

`No visibility'

Investors are wary of what a slowdown in LBOs may do to Blackstone's earnings.

``The bubble of enthusiasm is gone. It's the morning after the party,'' said Francis Gaskins, president of IPODesktop.com in Marina Del Rey, California. ``There's no visibility for earnings, and no earnings visibility means uncertainty.''

Takeover firms usually pay for as much as two-thirds of their acquisitions with money borrowed by the companies they target. The rest is financed with cash from their funds.

``Deals are being delayed, deals are being pulled and deals aren't being fully subscribed at the moment,'' Michael Ridley, the co-head of JPMorgan Chase & Co.'s global high-grade debt capital markets and syndicate business said in an interview today. ``We're going to need to get back to the drawing board with some of our clients.''

Default-Swap Performance

The extra yield, or spread, investors demand to own high- yield bonds instead of Treasuries has widened 0.15 percentage point to 2.66 percentage points this week, the biggest gap in a month, Merrill Lynch & Co. index data show. The spread reached a record low of 2.41 percentage points on June 5.

Credit-default swap investors, who speculate on the ability of companies to repay their debt or hedge against defaults, have been signaling more concern over the amount of debt companies are taking on in leveraged buyouts.

Of the 25 worst-performing credit-default swaps in the past month, seven are tied to the largest buyouts that are expected to seek financing in the next 12 months. They include TXU Corp. and First Data Corp., according to composite credit-swap prices from London-based CMA Datavision.

Contracts tied to $10 million in TXU bonds have surged $102,200 to a record $320,400 since June 13, the day before the Dallas-based power producer said it received a commitment for $32.7 billion of debt financing to fund what would be the biggest buyout.

Credit-default swaps are designed to protect bondholders against default. They pay the buyer face value in exchange for the underlying securities should the company fail to meet its debt obligations.

Blackstone's shares rose 13 percent on June 22, the first trading day. They lost 7.5 percent on June 26 before today's decline.

To contact the reporters on this story: Jason Kelly in New York at jkelly14@bloomberg.net; Elizabeth Hester in New York at ehester@bloomberg.net.

Last Updated: June 26, 2007 16:21 EDT