Why Blackstone IPO Is a Terrible Deal
04/04/2007 12:00 am EST
The proposed initial public offering (IPO) by the Blackstone Group is a very, very, very bad deal for investors.
The Blackstone Group, a private investment group with almost $80 billion in assets under management, has filed to go public. The IPO aims to raise about $4 billion in the public markets by selling 10% to 15% of the firm that manages all that money.
I expect this offering to sell like ice water in the Sahara. The returns its funds have garnered--for example, the annual 23% for the company's private-equity funds since 1987-- are enough alone to create the kind of demand that drives an IPO up on the first day of trading.
None of which makes this a good deal for investors. Frankly, I think it's terrible. Why?
1. Investors aren't buying the funds themselves. The Blackstone Group is selling the company that manages that money. I doubt that everyone buying shares will understand the difference.
2. Investors are paying a big premium. That business, to be renamed, Blackstone Holdings, is certainly profitable--at least it was last year, when the management company made $2.3 billion. But the IPO will value Blackstone Holdings at $40 billion or so. Lehman Bros. (NYSE: LEH), which earned $4 billion in the past 12 months, is worth only $37 billion.
3. Investors are paying for past performance. Investors buying shares in the IPO are betting that current and future deals will earn the same profits as Blackstone has reaped during the current top of the buyout cycle. It's unlikely that the next part of the cycle will be as profitable.
4. Investors will have no say in how the company will be run. Since Blackstone Holdings will be structured as a master limited partnership, investors will be unit holders instead of shareholders.
5. Investors will have no say, again, on what Pete Peterson, Stephen Schwarzman and the other partners pay themselves. The Wall Street Journal calculates that Schwarzman, now worth about $10 billion, could see his net worth double as a result of the IPO.
The very smart guys at the Blackstone Group who are doing this deal see the handwriting on the wall. The success of buyout funds like theirs has been built on cheap debt.
But this game is coming to an end, and equity, the kind of money you raise by selling stock to the public, starts to look relatively attractive. That money is a permanent "loan" since it never has to be paid back to investors who buy the stock. And it comes without restrictions.
Where Blackstone has gone, other buyout funds will follow, so you can expect to see a steady stream of IPOs from Blackstone's competitors. Each deal will be just another bit of evidence that the era of cheap debt is moving toward a close.