Blackstone IPO: Price too rich?
In the opening pages of the document outlining its initial public stock offering, private equity giant Blackstone Group attributes its success to investing “at the right time and at the right prices.”
For investors who are mulling over whether to buy Blackstone stock, which is expected to begin trading publicly Friday, that investment philosophy is worth keeping in mind.
Blackstone’s planned public debut has generated enormous interest because it would open a door into the red-hot private equity industry. Blackstone is one of the sector’s leading firms, and its earnings and investment returns have been eye-popping.
But if its shares sell within the price range projected by the firm, investors will be paying a steep price for the company’s earnings, some analysts say. And given that private equity firms make their money by buying companies at rock-bottom prices and selling them when the time is right, investors should ask whether Blackstone would buy itself at such a valuation.
The risk, experts say, is that the Wall Street “smart money” is selling just as private equity’s fortunes are cresting, at least in the short term.
“You can buy a fantastic company at a terrible price. We’ve seen that time and time again,” said Jeffrey Ptak, an analyst at Morningstar Inc. “By all indications, Blackstone is a fantastic company. The economics of the business are second to none. It’s just a question of the price.”
Blackstone plans to raise as much as $4.75 billion by selling as many as 153.3 million shares at a price of $29 to $31. The final price is expected to be set after the market closes today.
Private equity firms raise money from large investors to buy and restructure companies in hopes of selling them at much higher prices several years later. Thanks to low interest rates and a percolating corporate-merger market, the industry has exploded in recent years.
Blackstone’s private equity funds have notched an average annual gain of 23% after deducting Blackstone’s sizable management fees, while its real estate funds have risen 31%, according to the firm’s regulatory filings. Its profit surged more than 70% last year to $2.3 billion while its revenue more than doubled.
If Blackstone goes public at $30, its price-earnings ratio (share price divided by earnings per share) would be about 14, based on the company’s 2006 results. By comparison, premier investment bank Goldman Sachs Group Inc., which has a large private equity operation, trades at about 11 times profit.
Shares of Fortress Investment Group had a price-earnings ratio of about 15 when the company went public in February at $18.50 a share. With the shares now at $26.52, the ratio has risen to about 22.
For investment banks and some other financial companies, price-earnings ratios are typically low compared with the broad market because the sector’s earnings are considered highly volatile.
Nearly all the shares sold in the Blackstone IPO will probably go to institutional investors and the occasional well-connected individual investor. So for most individuals, the decision to buy shares might depend on how Blackstone’s shares fare after trading begins.
Fortress Investment Group, the only other publicly traded “alternative investment” firm, rose as high as $37 on its first trading day in February before closing that day at $31. The stock closed Wednesday at $26.52.
David Menlow, president of research firm IPOfinancial.com, says individuals should sit out the first day of trading and refrain from chasing the stock if it jumps in the first week or two. But he recommends buying after that if the stock is near the IPO price. Blackstone is a bellwether firm in a hugely profitable industry, he said, adding, “This is the company to own.”
Potential investors should keep in mind that they wouldn’t be getting a piece of Blackstone’s coveted investment funds. Rather, they would get a piece of the management company itself, betting that Blackstone’s phenomenal growth can continue.
Blackstone’s fortunes could rest on two factors, experts say. The first is bond yields, which have risen recently, sending shivers through the private equity industry because it relies heavily on debt to fund its acquisitions and boost its returns.
The other factor is that Blackstone may face a large jump in its taxes. Two senators are proposing a bill that would tax publicly traded private equity firms more heavily than they are now. That would eat into Blackstone’s earnings and its stock price.
Some in private equity acknowledge that everything has gone the industry’s way lately.
“It can’t get any better than it is right now,” David Rubenstein, co-founder of Blackstone rival Carlyle Group, said at a recent conference. “But any time you think things are going perfectly well, something bad is probably going to happen.”
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Begin text of infobox
Diverse portfolio
Selected companies in which funds operated by Blackstone Group hold stakes:
* Cadbury Schweppes (European beverage unit)
* CarrAmerica Realty Corp.
* Celanese Corp.
* Deutsche Telekom
* Equity Office Properties Trust
* Extended Stay America
* Freescale Semiconductor Inc.
* La Quinta Corp.
* Michaels Stores Inc.
* SunGard Data Systems Inc.
* Trizec Properties Inc.
Source: Blackstone Group
