justme… There’s another public company that holds a “hodgepodge of privatized companies, hedge funds (re: insurance holdings), debt obligations and more.” Perhaps you’ve heard of it, it’s called Berkshire Hathaway. Yes, some of Berkshire’s holdings are publicly-traded companies, but the majority of its cashflow comes from private companies and other investments (bonds, currencies, etc.). So, the issue that most of Blackstone’s holdings will be private is a huge red herring. (What is GE, after all, but a huge conglomerate of private companies?)

Blackstone makes money in two ways: (1) If its holdings increase in value and it sells these holdings there is a capital gain, and (2) It charges investment banking fees to raise capital and handle M&A on behalf of its portfolio companies. After the IPO Blackstone will have other shareholders that will share in these proceeds. So, to answer your question, yes, there will be revenue and profits (assuming things go well, that is). What do you think the partners have been living off of for the last two decades?

Now, the big risks are two-fold, both of which you touched on. First, like an investment bank, a large share of the profits will go to the employees. If you don’t pay these people, they leave. A big challenge is figuring out the optimal compensation for employees mindful of the fact that you want to keep most of them BUT that you also need to provide your non-employee shareholders with a return as well. It’s an age-old dilemma with financial companies, particularly investment banks (and now these private equity organizations). Second, as you alluded to… when these guys are, in effect, selling a piece of their business, are you sure you want to be buying? Smells like a top to me, although there could be a little gas left in the tank in the short term.

The far better transaction for investors would be to fund a much smaller buyout group that was still on their way to achieving huge success. But that’s unlikely to happen because people are sheeple… they’d rather invest AFTER the big run-up (along with everyone else) and realize low returns than invest BEFORE the run-up (alone) and realize larger returns. As Keynes once observed, “Worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally.”

Personally I’m agnostic on the whole issue. But I suspect we’ll look back and see this as a top in private equity – particularly where the huge multi-billion dollar deal companies, like KKR, TPG, Hicks Muse, etc., are concerned.