San Diego Housing Bubble News and Analysis

I'm not participating after reading the WSJ article on Schwartzman (sp?) earlier this week. Also, the WSJ article yesterday detailing why 17 underwriters are involved reminds me of the dot com mess where analysts wouldn't tell the truth for fear of retribution.

I'm assuming the article portrayed him in a negative light. So you won't be buying due to ehtical concerns then?

Does the high amount of underwriters reiterate that the company will have no earning fundamentals and all capital raised will strictly be on the rush to buy?

Buying into a private equity IPO strikes me as one of the worst investments one could make right now...the market is already flooded with liquidity, and they are selling because they think the market is frothy. A professional investor doesn't sell $2 for $1 the desire for a liquidity event and tradeable market notwithstanding.

Stan

The intent is to get in early to ride out the large initial surge and then sell for short term gains and then possibly sell short as the stock tumbles.

Obviously, an initial surge is not uncommon, and some upside is usually priced in by the underwriters. That said, a surge simply means the initial sellers left money on the table...I wouldn't count on it...Blackstone isn't likely to leave large sums on the table.

Stan

I shorted FIG (Fortress) for the same reason. Smart money sold out enormously on the IPO; resulting in a levered and opaque shell of something or who knows what?

It paid off today and I closed out---there is some talk of changing tax rules of these private equity to be equivalent to ordinary corporations.

Also think: Sam Zell selling out EOP, and his web ditty, "Capital is falling on my head."

Blackstone seems to be the opposite of Google.

Google has hypernerds and an impossible-to-replicate-or-overcome product. And their advantages keep on compounding: more money, more revenue, and more alpha geeks to keep their algorithms even better than the next. Read the latest NYT article about their technology to see how much damn work they put in to The Google. Contrary to glib commentators, this is not at all something easy to replicate in a garage.

What advantages will post-IPO Blackstone have now?

They were financially naive and left money on the table. You think Blackstone will be the same?

(PS: I get Blackrock confused with Blackstone frequently! Both are NYC financial something or other companies, but different.)

I haven't read the Blackstone S-1 filing, but it seems to me that when a company that makes money by taking corporations private wants to take *itself* public, instead of floating their private subsidiaries, watch out!! Clearly someone is headed for the exits here.

How are you supposed to value Blackstone's internal holdings when they are a hodgepodge of "privatized" companies, hedge funds, debt obligations and more.

Does BX have revenue per se? Profits? Dividends? Does it extract the profit of all the subsidiaries that it owns, partially or fully? Will it report them in detail?

It's almost like creating a mutual fund of itself, minus the transparency of having a market-determined value of what the fund owns. Seems fishy. Especially given that insiders are cashing out some nontrivial holdings directly in the IPO.

additionally I believe this will be non voting shares or units. You simply won't have any owner ship in their holdings rather just units of the actual management company. Odd.

justme... There's another public company that holds a "hodgepodge of privatized companies, hedge funds (re: insurance holdings), debt obligations and more." Perhaps you've heard of it, it's called Berkshire Hathaway. Yes, some of Berkshire's holdings are publicly-traded companies, but the majority of its cashflow comes from private companies and other investments (bonds, currencies, etc.). So, the issue that most of Blackstone's holdings will be private is a huge red herring. (What is GE, after all, but a huge conglomerate of private companies?)

Blackstone makes money in two ways: (1) If its holdings increase in value and it sells these holdings there is a capital gain, and (2) It charges investment banking fees to raise capital and handle M&A on behalf of its portfolio companies. After the IPO Blackstone will have other shareholders that will share in these proceeds. So, to answer your question, yes, there will be revenue and profits (assuming things go well, that is). What do you think the partners have been living off of for the last two decades?

Now, the big risks are two-fold, both of which you touched on. First, like an investment bank, a large share of the profits will go to the employees. If you don't pay these people, they leave. A big challenge is figuring out the optimal compensation for employees mindful of the fact that you want to keep most of them BUT that you also need to provide your non-employee shareholders with a return as well. It's an age-old dilemma with financial companies, particularly investment banks (and now these private equity organizations). Second, as you alluded to... when these guys are, in effect, selling a piece of their business, are you sure you want to be buying? Smells like a top to me, although there could be a little gas left in the tank in the short term.

The far better transaction for investors would be to fund a much smaller buyout group that was still on their way to achieving huge success. But that's unlikely to happen because people are sheeple... they'd rather invest AFTER the big run-up (along with everyone else) and realize low returns than invest BEFORE the run-up (alone) and realize larger returns. As Keynes once observed, "Worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally."

Personally I'm agnostic on the whole issue. But I suspect we'll look back and see this as a top in private equity - particularly where the huge multi-billion dollar deal companies, like KKR, TPG, Hicks Muse, etc., are concerned.

Blackstone is the best of the best, so it might make sense to invest with them. Another IPO boom would certainly increase my vigiliance with respect to a market "top", though.

Great input, but what are you referring to by saying it is "top" you mean it has a possibility to be one of the big 5?

I have no idea what "big 5" you're referring to... but by "top" I mean that this IPO will likely mark the peak in private equity activity (and valuations) and interest for several years, just as Sam Zell's sale of EOP (to Blackstone!!) probably marked the top for commercial real estate for some time, the Sandlers' sale of World Savings probably marked the peak in residential real estate, and the massive insider sales by homebuilding executives marked the top for the homebuilders back in 2005. Generally when the smartest people in an industry are selling you probably shouldn't be buying. There are always exceptions to this rule... but over time it's better to avoid these situations.

So do you feel I shouldn't steal a quick 10-20% profit and sell. I will literarily sell the stock intraday if I have to.

FIG has lost big time since its IPO in Feb, so who knows? I don't have a real good feel for either the bull or the bear case for a private equity public offering. It does seem a little weird though ... what's the point of private equity if the company goes public?

Private equity funds were based on the premise that the public markets are stupid and short sighted, plus the fact that debt is very cheap now.

They are flippers. The business model is similar to real estate flippers, except that they're smarter at requiring cash flow to cover debt. They take debt, buy company, do some cosmetic resurfacing and sometimes some amputations, wait a bit, and sell out with great marketing.

For them, selling their companies off in public is their "exit strategy', how to get paid.

When people with this attitude sell their own company public, what do you think that means?

Do you think their own valuation ideas are suddenly different now when it comes to their own business? Or maybe they are even more sharply focused on "Sell when the public can be fooled for the maximum price" when they are getting 100% of the transaction capital instead of their 20% skim off the top.

Berkshire Hathaway firstly is much more open, and secondly, they don't have an 'exit strategy'. They buy to keep a business because it is good. They sell when they think they made a mistake.

Berkshire Hathway thinks it loses money on transaction fees and so it is prudent and cautious about transactions, and keeps cash when it can't put it to work in the way it feels to be a good investment. It invests its own money.

Blackstone etc---more specifically the ultra plutocratic partners---get PAID quietly and opaquely jiga-simoleons for each transaction---done by financing with Other People's Money, debt or equity.

Blackstone revels in high leverage---cold cash is distributed to their partners humongous paychecks the moment it hits the bank account. Heads they win, tails somebody else loses.

And finally, Warren Buffet is unusually honest and ethical.

It seems that in just about every way that matters Berkshire Hathway is entirely different from Blackstone.

DrChaos, you managed to miss my point entirely. I brought up Berkshire Hathaway merely to point out that the fact Blackstone's holdings would be mostly private should not be a big issue in its IPO because many other public companies - like Berkshire Hathaway - also held mostly private companies.

I agree that in just about every OTHER way Berkshire is entirely different from Blackstone. Actually I'd probably say "very" different as opposed to "entirely" different, but that's a matter of semantics.

How you managed to read my post and get the idea that I was making a blanket comparison between Berkshire Hathaway and Blackstone - outside of the issue of the fact that they both invest in private companies - is a mystery to me.

Carlmichael, I'd never begrudge someone the 10%-20% intraday profit they think they deserve. I'd say the odds of your getting an allocation of the IPO, however, are roughly 0% unless you're a huge client of the underwriters. And buying it in the secondary market... well, hey, best of luck with that.

Yea my chances of getting in the IPO are null I already verified I'd just have to get in and out on the open market. You know this is random but I get way better responses in this tiny private forum on some small San Diego themed site than on most mega financial forums.

Carl-
If you can answer the question, "Why is Blackstone a better stock investment than Fortress", then you might go ahead and make the investment.

Personally, I don't know the answer to that question, either way.

edit - $31/share ... public trading opens tomorrow.

Anyone buying? On the one hand, FIG is worrisome. On the other hand, the "subscriber" count for the IPO was crazy, and there seems to be lots of non-US demand for the stock.

Hmm.

what about buying put options? you know the stock will jump, one way or the other then gradually slide...

Doesn't it give you a warm fuzzy that they moved the IPO forward a week?

Caveat emptor

http://business.timesonline.co.uk/tol/bu...

Nor_LA-Temcu-SD-Guy

Maybe that cheap money (Borrowed) used to finance the purchase of these companies isn't going to be that cheap in the near future ???

Or the companies to buy not all that cheap either

Just a thought ..

What kind of options would one buy to take advantage of this anticipated increase?

Well, Carl, I bought in at the opening of 36.45. I can't believe I just bet against Congress ... cmon W, wield that veto pen.

Most of the increase will be priced in. You can trade calls to play spreads on expected increases. Since you seem new to it you should keep it small and only play with the lunch money to get an idea of the game. It is something that takes a while to get used to and just learning the subtleties could put you in a position to be taken by the sharks.

I personally will be shorting the hell out of it. That company as well as other PEs will be tied to the rising rates and be priced out of a lot of deals soon. On top of that if the tax rates increase on them by the hands of Congress then their bottom line moves even closer to 0.

cheers,

chris

I just bought in at 37 and I placed a short sell order on 200 shares of SIX after the report of a teenagers legs being severed on a Six Flags theme park.

FWIW - the stats on buying IPO's on the open the first day of trading on the stuidies I have done, are about 50/50 that the price will be higher one year later. As a result, there is no reason to chase them, they are no better than a flip of the coin. Some obviously like GOOG are home runs, but there are just as many flops.

I had assumed that the Blackstone IPO was just a group of greedy, Johnny-come-latelys taking advantage of the outrageously loose money environment today.

I read in the Union-Buffoon this morning that the firm was founded in 1985 with $400K out of the founders' pockets.

That's actually a heart-warming story, to me.

No, instead they're a group of greedy, Johnny-came-earlies taking advantage of the outrageously loose money environment today. I don't use the term "greedy" in a negative sense, however, despite the humorous, less-than-favorable profile of Schwartzman that was in the WSJ several days ago. Clearly these guys were innovators and have done well - I don't begrudge them their billions. But I think the days of outsized returns by the large PE groups like Blackstone (and KKR, TPG, etc.) have passed. They've got the same problem as Warren Buffett: way too much capital chasing too few decent deals. At some point, the law of large numbers cripples even the financial geniuses. I think the music's stopped for the big PE players but they're all still dancing. But, hey, if they can monetize a part of their equity on the backs of dreamers (the IPO participants), why not?

1) Don't be greedy
2) Pare your losses

My weekend assignment, to write 1 bazillion times.