Jeremy Warner's Outlook: Irony lost on Blackstone as private equity partners cash in with stock market float

Trade unionists licking their lips at the prospects of full disclosure on the inner workings of private equity promised by the forthcoming stock market flotation of Blackstone, one of the biggest private equity operators of the lot, are likely to be sadly disappointed.

A little bit of the veil that surrounds private equity will be lifted as a result of the Blackstone IPO, but not much. Indeed, the whole thing is being deliberately structured to preserve as much of the traditional secrecy of the private equity house as possible.

Filings with the SEC yesterday reveal little not already known beyond the news that the chairman and founding father, Stephen Schwarzman, is to be paid a "mere" $350,000 a year for his labour. What's more, there's no contract or golden parachute, allowing the company, in theory, to fire him without compensation should he begin to tire or fail. This hardly fits the stereotype of the "asset-stripping" private equity buccaneer.

Deliberately so, I imagine, for base salary is not how the senior partners of private equity houses make their money. Rather it is through share of partnership dividend and the opportunity to invest on favourable terms in the funds and companies they manage. The IPO is unlikely to throw much light on the obscurity of these arrangements. Quite how these conflicts are managed when the firm is publicly traded is a question yet to be properly answered. The planned conflict resolution committee is likely to have its work cut out.

There is an obvious irony in private equity, the scourge of public markets, joining the very system its players attack for supposedly excessive disclosure obligations and failings in value creation. Mr Schwarzman has frequently referred to the "tyranny of quarterly reporting". Now he seems to have agreed to become one of its underlings.

But only up to a point. If there are downsides to public markets, Blackstone has come up with a structure intended to avoid them. The partnership is to remain. Rather than incorporating and floating, Blackstone is to sell "partnership units" in the business. By so doing, Mr Schwarzman neatly sidesteps much of the disclosure and corporate governance regulation that applies to a normal publicly quoted company.

Yet by selling between 10 and 15 per cent of the firm, the partners cash in to the tune of $3bn to $4bn and assign a market value to the rest. Hey presto, Mr Schwarzman capitalises his interest in the partnership, said to be around 30 per cent of the total, while at the same time retaining the unique advantages and culture of Blackstone's partnership structure. Not for nothing are these guys as rich as they are. Precisely how rich, you are unlikely ever to know.

Sub-prime warning from Kensington?

Is the meltdown in US sub-prime lending about to arrive on these shores? Those of a pessimistic frame of mind will think the question answered by the profits warning and public defenestration of the chief executive announced by Kensington Group yesterday. Kensington is one of of the biggest lenders in Britain specialising in mortgages for those with poor credit records. To the extent that there is a sub-prime market in the UK to compare with the US, Kensington is a large part of it.

Even so, yesterday's profits warning appears to have very little to do with rising delinquency rates. Rather, it seems to be down to greater levels of competition, and a shift in the business model away from securitisation of the company's mortgages and towards straight portfolio sales to other lenders. Neither development is in itself a sign of a collapse in the sub-prime market. Repossessions, though rising, are still relatively subdued, and, at 9.8 per cent, the number of accounts falling into arrears is less than it was a year ago.

All the same, it would be unwise to think Britain immune to the mayhem going on in the lower echelons of the US housing market. Continued rapid inflation in house prices is encouraging growing numbers of buyers to overextend themselves.

Lending standards have been widely lowered, with a growing trend towards "self-certification" and interest-only mortgages, where the lender relies on the word of the borrower on earnings and there is no repayment of capital. Interest rates have risen strongly, yet, paradoxically, some mortgage providers have become less vigilant in their lending criteria.

Similar observations can be made about the corporate market, where there is a growing trend to "covenant-free", or near "covenant-free" lending. Anecdotal evidence is of breaches of existing covenants being routinely ignored. All these are worrying signs and no doubt good cause for concern about the future.

Yet in themselves they tell us little about when the credit cycle might turn. It is only when the tide goes out that you see how many people have been swimming around with their trunks off. For the time being, it still seems to be coming in.

Sir Fred has no plans for ABN Amro bid

Sir Fred Goodwin, chief executive of Royal Bank of Scotland Group, wanted to talk about his new head of American operations, Ellen Alemany. Unfortunately for him, everyone else wanted to talk only about whether he might make a bid for ABN Amro, the Dutch bank attempting to thrash out an agreed merger with Barclays.

Yesterday's conference call was as a consequence not a terribly illuminating affair. We've poached one of Citigroup's rising stars, Sir Fred announced. Yawn. OK, so how about this. There's room for another big-league commercial bank in the US and RBS has every intention of being that player. Fine, but what about ... No, really, there's a step-change going on in our US business and it is important people understand what it is. Sure, sure, but are you going to bid for ABN Amro? Answer came there none.

For those paid to make a trading opportunity out of nothing, this in itself was news. At his results conference last month, Sir Fred said he had no plans for a "transformational deal". No comment is not a denial and could be interpreted as a marked change in tone from the earlier pronouncement. Yet, when pushed, he also said that his acquisition guidance remained unchanged, a statement which would seem to confirm lack of interest in a transformational deal.

I'm not sure where any of this really gets us. ABN arguably makes a better fit with RBS than it does with Barclays, but, even if Sir Fred did feel tempted to enter the fray, it's not altogether clear he could.

At his results conference, Sir Fred declared himself out of the City sinbin, a reference to the fact that investors seemed to be warming to him and his strategy for the bank. Yet this change in sentiment is very much based on the idea that Sir Fred has been persuaded against further empire building.

He's essentially committed himself to bedding in his US acquisitions before doing anything else. Could the appointment of Ms Alemany be interpreted as a signal that the job is now done, and, if so, is Sir Fred saying it is time to move on to something else?

Well maybe, but an intervention in the ABN bid situation would go down like a lead balloon in the City, and in any case Sir Fred would find it much less easy to smooth his passage with ABN than Barclays has. There could be no question of RBS relocating its head office from Edinburgh to Amsterdam, even as only a brass-plate exercise. Nor would the UK Financial Services Authority be at all happy with the lead regulator's position going to Holland.

Things may change, but the bottom line is that Barclays has a rather better chance of pulling off this deal uncontested than the markets believe. I can't see either RBS or Citigroup taking the plunge. For the time being, the focus of Sir Fred's attention is on the US and Asia. It's against his instincts, but reluctantly, he'll have to leave ABN to Barclays.

j.warner@independent.co.uk