March 23 (Bloomberg) -- Blackstone Group LP employees generate almost nine times more earnings than their counterparts at Goldman Sachs Group Inc., Wall Street's most-profitable investment bank.

Each of New York-based Blackstone's 770 workers produced an average of $2.95 million in net income last year, according to documents filed yesterday with the U.S. Securities and Exchange Commission. At Goldman, the world's biggest securities firm by market value, the mean was about $360,000 in 2006.

Blackstone earned $2.27 billion in 2006, 71 percent more than a year earlier. Money-management fees were $1.12 billion and investment gains totaled $7.59 billion, as the firm's private- equity funds returned more than 20 percent and its real estate investments almost doubled.

``Blackstone is an amazing story,'' said Jonathan Insull, a New York-based managing director at TCW Asset Management Co., which runs almost $4 billion in bank loans. ``They have built up a terrific franchise in private equity.''

The company, founded in 1985 by Stephen Schwarzman and Peter G. Peterson, said yesterday it would raise as much as $4 billion selling a minority stake in the largest-ever IPO by a U.S. buyout firm. Blackstone will use the money to expand into new businesses or pay partners as they leave.

``They'll get a potential source of permanent capital, where they can capitalize on their earnings and provide some liquidity to their partners over time,'' said Frederick Joseph, managing partner of Morgan Joseph & Co. and former chief executive officer of Drexel Burnham Lambert Inc., the biggest LBO financier of the 1980s. ``It's a potential source of capital if they want to broaden what they're doing.''

Relative Values

Should Blackstone get the same market valuation as Fortress Investment Group LLC, the private-equity and hedge-fund manager that went public on Feb. 8, it would trade at 37 percent of its $78.7 billion in assets under management, or about $29 billion. If investors value it like Goldman, at 10 times earnings, its market capitalization would be $23 billion.

``Ideally, you would break it down into the particular business components and apply some kind of industry multiples and factor in their growth rates,'' aid James McBride, who helps oversee about $400 million as vice president of Trendstar Advisors LLC in Overland Park, Kansas. ``A lot of it depends on the management. It's the guys running this entity that you're really believing in.''

Boom Times

Under CEO Schwarzman, 60, and Senior Chairman Peterson, 80, both former Lehman Brothers Holdings Inc. bankers, Blackstone has invested $33 billion of capital in 321 private-equity and real estate transactions with a combined value, including debt, of $293 billion.

Blackstone's funds currently own companies with 375,000 employees and $83 billion in annual sales. That compares with General Electric Co., the world's second-biggest company by market value, which has more than 300,000 employees and reported revenue from continuing operations of $163.4 billion last year.

Blackstone said in the filing that President and Chief Operating Officer Tony James has been selected as Schwarzman's eventual successor. James, 56, joined Blackstone in 2002 from Credit Suisse Group where he was chairman of global investment banking and private equity.

The lowest borrowing costs in a decade have allowed LBO firms to do deals faster than ever. The $144.7 billion of private-equity deals and management buyouts announced this year is ahead of 2006's record pace by 14 percent, data compiled by Bloomberg show.

Record Fundraising

Blackstone in February bought Equity Office Properties Trust for $23 billion, plus $16 billion in assumed debt. That deal, then the largest LBO of all time, was eclipsed before the month ended as Kohlberg Kravis Roberts & Co. and TPG Capital agreed to acquire power producer TXU Corp. for $45 billion, including assumed debt.

Now, Blackstone is raising $20 billion for a new fund, the industry's largest ever, and as of March 1 had $18.1 billion in commitments, according to the IPO filing.

LBO firms typically use a mix of cash from investors plus their own money and debt secured by the targets they buy to finance deals, then generate a return for investors by selling the assets to other funds or public investors within five years. Blackstone said its private-equity funds have returned an average 23 percent a year, after fees, and its real estate investments have gained 29 percent.

Real Estate

Schwarzman and Peterson, who led Blackstone into private- equity in 1987 and broadened into real estate in 1991, have expanded into hedge-fund investing, private debt and mutual funds. Private equity remains the firm's top moneymaker, with $1.01 billion of pretax profit in 2006. Real estate produced $902.7 million, followed by investment banking at $194 million and alternative-asset management at $192 million.

The diversification has made Blackstone look increasingly like Wall Street firms such as New York-based Goldman. Goldman had record net income of $9.5 billion in fiscal 2006. Blackstone's profits exceeded those of Bear Stearns Cos., the fifth largest securities firm by market value, which earned almost $2.1 billion.

``This is yet another example of how the markets have taken over banking functions,'' said Martin Mayer, a guest scholar at the Brookings Institution and author of ``The Bankers'' (Ballantine Books, 1975). Blackstone is ``a sort of pirate's monastery,'' he said.

Each of Blackstone's employees will get a stake in the company when it goes public. New unit-holders will have a limited say: They won't elect the general partner or directors, a right the founders will keep.

``I don't think there's any benefit to anybody except the people who are partners in this firm who'll be able to cash out,'' said Mayer.

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

Last Updated: March 23, 2007 06:53 EDT