Anyone buying into the Blackstone (BX) IPO?

[Carlmichael]

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.

[Carlmichael]

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.

[davelj]

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.

[davelj]

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.

[HereWeGo]

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.

[HereWeGo]

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.

[Carlmichael]

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?

[Carlmichael]

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?

[davelj]

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.

[davelj]

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.

[Carlmichael]

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.

[Carlmichael]

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.

[HereWeGo]

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?

[HereWeGo]

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?

[Anonymous]

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.

[Author]

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