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Blackstone looks set to be the Teflon initial public offering. Real problems have been thrown at it. None appear to have stuck enough to unsettle it. It was forced into a U-turn on its aggressive accounting. Lawmakers last week proposed a bill that could raise Blackstone’s tax rate by about 20 percentage points. There have even been serious bond market wobbles.

But the private equity firm still looks set to ride a wave of demand from investors who believe the party in the credit markets and private equity can go on. Shares in rival Fortress Investment Group fell 7 per cent on last week’s tax news and have since bounced 13 per cent.

A $32bn valuation, at the middle of Blackstone’s range, would be well below the $40bn mooted early in the process. But it would still represent a chunky 26-times last year’s pro-forma economic net income after 17 per cent tax (or 34-times if adjusted for a more typical corporate tax rate).

That assumes that Blackstone’s enviable record of investment returns – helped by recent perfect conditions – does not degenerate significantly longer term. That would cut rapidly into the performance fees on which the company relies heavily and would make it tougher to grow assets under management, which it also needs to justify its valuation. Even with good performance, the sheer scale of Blackstone’s $88bn under management means it has to raise and invest large amounts each year to stand still.

The business model is highly geared to investment performance and hence conditions in the credit and mergers and acquisitions markets. When today’s euphoria evaporates those will face serious pressure. So will Blackstone’s valuation. But short term, 2007 looks set fair. Blackstone made half of last year’s profit in the first quarter. Superficially at least, its multiple will quickly start looking less outlandish if the music keeps playing for a while.

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