It may seem ironic that Blackstone, a private equity firm that made billions taking companies private to free them from market pressures and burdensome financial regulation, now intends to make its own public offering. But we shouldn’t be surprised. The public offering is a glimpse into a business that is fundamentally transforming, and perhaps replacing, the modern corporation.

As Blackstone emphasizes in its offering materials, its proposal would create a different kind of public firm. Blackstone is not so much going public as going “privlic.” Initial public offerings once transferred control from entrepreneurs to dispersed public investors. Blackstone’s IPO doesn’t transfer a smidgeon of control. The public will hold limited partnership units in a limited partnership (Blackstone Group L.P.), which in turn owns firms that are general partners in still other firms that own and operate the funds, and that have their own limited partners. Blackstone Group, in turn, is run by a limited liability company that is, in turn, owned by Blackstone’s senior members. If all this seems confusing, the prospectus is at least clear about the bottom line: the real power at Blackstone lies above and below the publicly held entity that’s being inserted in the middle. The public investors can't elect or replace the manager of their own firm, let alone those of the lower-level holding companies and the still lower level operating companies in Blackstone’s gigantic portfolio. Any voting power the new limited partners have amounts to a right to be outvoted by the existing owners.  

This sort of governance structure is not that different from dual class stock in firms like Google and the New York Times. The new ripple is that the limited partnership has ducked under the cover of Delaware limited partnership law to curtail the general partner’s fiduciary duties. Stephen Schwarzman and Blackstone's other senior managers have “sole discretion” to decide critical business matters. Though the structure is rife with potential conflicts between public and private owners (for example, the different sets of owners may have different investment horizons), the partnership’s directors are the ultimate arbiters, and the limited partners may find it hard to challenge these decisions in court.

Vast chunks of corporate America are devolving back into the partnership form from which they grew back in the 19th century.

While the business columnists prate about “shareholder democracy,” this prospectus shows us where business is really headed. These partnerships make publicly held corporations, which activists disparage as dictatorships, look like New England town meetings. The owners are not protected by voting, shareholder proposals, majority voting for directors, or any of the other paraphernalia of the publicly held firm.  Rather, the owners’ solace lies in the regular distributions of cash, the managers' high-powered incentive compensation, and the portfolio companies’ debt load, which concentrates their managers’ attention producing enough cash to avoid bankruptcy.  

This form of governance is being applied to a vast array of companies that used to be conventional publicly owned assets. Blackstone alone manages almost $80 billion, and has owned firms valued at a total of almost $200 billion over its 20-year history. Its portfolio includes firms as diverse as Freescale Semiconductor, Cadbury Schweppes, Celanese Corporation, Michaels Stores and Deutsche Telekom. Shareholders of publicly held firms have turned billions in investments over to partnership-type structures like Blackstone for the simple reason that these partnerships, with their ambitious plans for creating value in the firms they acquire, are willing to pay far more than the public market pays for firms managed in the traditional way. 

In short, vast chunks of corporate America are devolving back into the partnership form from which they grew back in the 19th century.  This should not be so surprising. There were always tradeoffs between the benefits of diffuse public ownership of firms and the costs. Public markets enabled entrepreneurs to capitalize their ideas, owners to diversify risk, and information to be rapidly discounted in the price of firm’s securities. But since thousands of diffuse owners cannot easily watch over their firms, managers are left free to serve themselves. Devices like independent directors, auditors, and takeovers might mitigate the problems, but they have costs and weaknesses, too. Hence the repeated calls for more managerial accountability, coupled with escalating regulation and criminal and civil liability. Blackstone and other private equity firms replace this whole structure with a new approach to accountability—expert monitors, strong incentive compensation, and a commitment to distribute excess cash. 

Critics wonder how private equity firms can justify paying so much more than the public market does for the same assets. If there is value that makes it worthwhile for private equity investors to pay their above-market purchase price, then why isn’t that value reflected in the acquired firm’s stock price?

These partnerships make publicly held corporations, which activists disparage as dictatorships, look like New England town meetings.

The most logical explanation is that something changed between the firms' initial entry into the public markets and their exit into private equity. Though Sarbanes-Oxley gets a lot of the blame for the flight to private equity, it's only part of the picture. The inherent costs of giving power to non-owner managers, noisy activist shareholders, and securities class action lawyers all combined with the increasing sophistication of firms like Blackstone to bring the traditional public firm, always a debatable idea, to the precipice.

The Blackstone public offering indicates there may be a new use for the publicly held firm – as a holding company feeding money down to private equity firms. One might wonder: If dispersed public ownership doesn’t work for ordinary corporations whose owners get at least some protection from voting rights and fiduciary duties, can it work when these owners become mere appendages to a privately held firm? But, again, this is not a conventional public corporation, and the new investors are not in any traditional sense owners. They are more like customers who are buying the expectation of a steady flow of cash.  Though the investors lack voting clout, they at least know that the managers have strong incentives to succeed. And if deals like this fail, future public investors aren't likely to line up to put more money in private equity.

The future is cloudy. "Privlic equity" firms face more than just market risks. For example, the IRS might not permit Blackstone to treat its publicly held operations like partnerships for tax purposes. Under that scenario, these corporate holding vehicles would be forced to pay tax before passing their earnings on to investors—and it’s not clear the business proposition would be attractive. There may be more political risk in the fact that the new structure cuts activist shareholders out of any say in how the portfolio companies are run. And while corporate managers have shared in the growing private bounty, they have reason to fear the rising power of the financiers.

But even if the privlic structure proves to be a problem, some version of private equity partnerships is likely here to stay. Though the publicly held corporation has had a long run, there is no reason why it should last forever. Publicly held firms may continue to be important, but the Blackstone offering shows that these firms needn't be anything like the corporations we're used to.

Larry E. Ribstein is the Mildred van Voorhis Jones Chair at the University of Illinois College of Law. He blogs at Ideoblog.