Considering Blackstone, One Year Later
Amidst the detritus of today’s broken markets, I felt compelled to look back and review some of my thoughts around the Blackstone IPO. Why? Because I had thought their filing had pretty much signaled a frothy equity market, and certainly a top for the private equity business, due both to the “perfect” environment for raising debt capital (e.g., savvy, opportunistic issuers coupled with liquidity-rich, brain-dead investors) and that some of the smartest money in the business wanted to take chips off the table and raise permanent capital. And were willing to take this step even in the face of much criticism and consternation from their LPs and others. Cries of hypocrisy came from every direction. But still Mr. Schwartzman pressed on.
Here is an extract from a post I had written 3/17/2007 titled Blackstone Going Public? Watch Your Wallet, Brothas:
But really, what does this mean? Mostly that Steve is calling the
top. Not an absolute market top, but a valuation top for his firm. Why?
- PE is just getting so big. Too big. Too much liquidity. At some
point in the not-too-distant future returns will degrade. He knows
this. He is sitting the catbird’s seat. He’s smart. We’re dumb. He’s
the deci-billionaire, remember?- “The real and perceived growth of the Blackstone business will
slow, so let’s monetize it while we can extract the momentum from the
market (read: dummies like us), right? And besides, guys, it’s mostly
my money, anyway.”- The public scrutiny of PE returns, its place in the market, and its
adverse PR will only intensify. There is a real issue with the tax
treatment of management fees - logic and reason implies that this may
well change. Why not monetize these on a capital gains-tax rather than
a ordinary income-tax basis? This is worth billions of capitalized
market value.- That whole issue of Steve’s saying for the last 20 years “Being
public sucks because of costs, complexity, scrutiny, etc.” applies to
everybody but him because, hey, now we’re talking about his money and
he wants it - now.
Looking back, I’d say that I was pretty much spot on from a motivation perspective. I expanded on this thought process in an editorial I penned for the Financial Times that was published 3/27/2007 titled Why the Blackstone Offer May Signify a Bubble:
My assessment is that we are in a private equity bubble of sorts. However, it
is not one that has ghastly implications for the overall market but, instead,
will have negative outcomes for those invested in private equity funds - and
certainly for those buying into the public shares of private equity management
companies such as Blackstone.********************
As long as the debt markets co-operate, all is well. But when debt investors
wake up to the fact that they are systematically underpricing risk, the highly
leveraged deal structures simply will not work. Deals will still get done
because private equity firms need to deploy their capital to build franchises
and justify their fees but leverage ratios will fall and returns will decline.
Bad for the overall market? Not really, because competition for doing deals in
general will remain strong owing to liquidity considerations. But bad for
private equity investors? Certainly, and now there will be one more constituency
at the table: investors in the public equity of these private equity firms. Here
is the rub.********************
Mr Schwarzman knows this full well, as do his colleagues at Kohlberg Kravis
Roberts, Texas Pacific Group, Apollo and others thinking about following in
Blackstone’s footsteps. They understand that the risk/reward calculus of the
private equity business (largely being borne by debt holders in today’s frothy
environment) could shift rapidly, closing a historically attractive window for
them to monetise their franchises. They see the private equity bubble and want
to extract value before it pops. But where does that leave the rest of us?
Unhappy, indeed.
Let’s take a quick look at the data:
GSPC S&P 500 Index
3/17/2007 (date of my first post): 1386.95
6/22/2007 (date of BX IPO): 1502.56 (+8.3% from 3/17 post)
3/28/2008 (last close): 1315.22 (-5.2% from post, -12.5% since BX IPO)
BX
IPO price: $31.00
6/22/2007 close: $35.06 (+13.1% from IPO price)
3/28/2008 close: $15.28 (-56.4% from first day close)
I think we can all look back at the Blackstone IPO as one of the definitive signs of the troubles yet to come. Mr. Schwartzman and his PE colleagues all saw the same thing, the possibility of a sea change in the debt and equity markets, but only he had the guts and the intestinal fortitude to get a deal done - fast. And his decisiveness certainly paid off in spades - for Blackstone insiders, that is. In the future we should be more aware of the signs the top tier of “Money People” are sending us. Because it was all right there for us to consider. But few people wanted to believe the end was near. Sadly, this is a fixture of the human condition, particularly as it relates to investing.
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COMMENT:
AUTHOR: howard lindzon
EMAIL: howard@lindzon.com
URL: http://www.howardlindzon.com
DATE: 03/30/2008 07:01:39 PM
you still thinking 2010 before we get some traction and avoiding goldman and blackstone
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COMMENT:
AUTHOR: Joe
EMAIL: joeson.ng@gmail.com
URL:
DATE: 03/30/2008 09:35:35 PM
so would this be a good vintage year for PE? its been shown that post-tech bubble turned out to be a good vintage for tech PE.
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COMMENT:
AUTHOR: colin nagy
EMAIL: colin.nagy@mac.com
URL:
DATE: 03/30/2008 09:53:45 PM
funny you posted this.
i randomly stumbled upon your FT piece in early march and promptly sent it around to friends. very prescient, indeed.
be well.
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COMMENT:
AUTHOR: R Downs
EMAIL: rrwwdd@yahoo.com
URL:
DATE: 03/31/2008 12:34:43 PM
And what might the Visa IPO be a harbinger of?
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COMMENT:
AUTHOR: Lacidar
EMAIL: radioriver@yahoo.com
URL:
DATE: 03/31/2008 09:53:04 PM
Schwartzman, PE collegues, and don’t forget the CEO of Related… he is now creating Vulture funds ready to buy many of the properties he created and sold as part of the real estate bubble.
I wonder how many feel this is in conflict with the notion of ‘thou shall not do a transaction if it yields no economic value’? I suppose the economic value resides in his bank accounts.
In the securities world we know this is not only a ‘thou shall not’ but actually illegal.
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COMMENT:
AUTHOR: Brad Stewart
EMAIL: brad@bradstewart.com
DATE: 03/31/2008 11:55:24 PM
Don’t forget Equity Office Partners with Sam Zell.
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2 years ago
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