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Blackstone Falls 17% Below IPO in Debt Market Freeze (Update1)

By Jason Kelly and Elizabeth Hester

July 27 (Bloomberg) -- Blackstone Group LP shares are trading close to their lowest level since the New York-based leverage buyout firm went public as investors shun riskier bonds and loans that LBOs need for funding takeovers.

Blackstone's stock closed yesterday at $25.70, 17 percent below the initial public offering price of June 21, making it the worst-performing IPO this year for U.S. companies that raised more than $500 million. Shares of Fortress Investment Group LLC, another New York-based private-equity firm, closed at $19.31, 48 percent below the $37 high on the first trading day in February.

``If you believe private equity is under some pressure, you are definitely going to take it out on these stocks,'' said Frederick Lane, managing director of Boston-based investment bank Lane Berry & Co.

Investors around the world are avoiding riskier assets such as the loans that finance LBOs after being stung by losses in the U.S. subprime mortgage market. That rout may hamper New York- based Kohlberg Kravis Roberts & Co.'s plan to raise about $1.25 billion in an IPO later this year.

Ryan O'Keefe, a London-based spokesman for KKR, declined to comment.

Shares of Blackstone, led by Stephen Schwarzman, fell to a low of $23.27 yesterday before rebounding in the final minutes of trading. It's now tied with Orbitz Worldwide Inc. as the worst- performing U.S. IPO this year. The Chicago-based online travel agency went public July 19, less than a year after being taken private by Blackstone.

Schwarzman's Profit

Schwarzman, 60, and Blackstone co-founder Peter G. Peterson, 81, sold a combined $2.56 billion of stock in the Blackstone IPO. Kravis and Roberts won't sell shares, according to the company's regulatory filing with the U.S. Securities and Exchange Commission.

The 10 largest U.S. IPOs in 2007 have returned an average of 14 percent in their first trading month and 11 percent this year. The Standard & Poor's 500 index, the benchmark for the U.S. stock market, has gained about 4.5 percent this year.

LBO firms typically pay for acquisitions with debt backed by the target's assets. They pay off the borrowing using cash flow and profit by selling the company three to five years later.

KKR, co-founded by 63-year-old cousins Henry Kravis and George Roberts, needs to raise money for some of the $136 billion of takeovers that it has announced this year, including the purchase of credit-card payment processor First Data Corp. of Greenwood Village, Colorado.

Chrysler and Boots

Chrysler, the Auburn Hills, Michigan-based automaker, and Alliance Boots Plc, the U.K. pharmacy chain that KKR is acquiring, failed to find buyers this week for $20 billion of loans. Ten banks, including Deutsche Bank AG and JPMorgan Chase & Co., were stuck holding the debt.

``Deals in the pipeline are going through some trauma,'' said Louis Bevilacqua, a partner and chairman of the mergers and acquisitions practice at New York-based Cadwalader Wickersham & Taft LLP. ``They've got to get buyers and sellers back into equilibrium.''

An index allowing investors to bet on the U.S. leveraged loan market fell to the lowest since it began trading two months ago. The LCDX index, tied to the speculative-grade loans of 100 companies, dropped 0.9 to 93.7, according to prices compiled by Goldman Sachs Group Inc.