Why I'm Adding More Blackstone Group

Since I was going to do a separate entry on Blackstone Group (BX) anyhow, I thought I might as well break this purchase out on its own. We are going to begin to rebuild this position on a pullback to a light support level around $13.00. I am hoping to rebuild the lion's share of this name on a move down to the mid $11 or even better mid $10s. But for now we'll take it from a 0.1% stake to 1.1% and hope we lose money on this first batch so we can buy lower in the future.

The volatility of this name has been immense, and current valuation is very difficult with all the moving parts and associated companies they control within the empire. All I know is we left a lot on the table in this position the past 6 weeks; while we enjoyed the $8s to $11s (in 2 weeks), we would have enjoyed the $8s to $15s (in 4 weeks) a lot more!


Steve Schwarzman has been one busy fellow of late. Aside from doing a quite rare bond offering (for a PE firm anyhow), Blackstone is setting up a local currency private equity shop in China. So I suppose this is yet another way to play China via U.S. channels. The bond offering is interesting considering BX already sits on an Apple-like $28 billion war chest. My only hope is this money actually goes for corporate activities and not simply to give handouts to management, as private equity firms are apt to do.

First the yuan based PE fund . Please note that the Masters of the Universe are also following suit... (last bullet point)

• Private equity firm Blackstone Group LP (BX) plans to launch a 5-billion-yuan ($732 million) fund that will primarily invest in the city of Shanghai, the city said in a statement on Friday. The fund is the first local currency yuan fund to be launched by Blackstone and will mean the establishment of a wholly-owned China subsidiary for the giant private equity company.
• Besides Blackstone, foreign early birds for such a move have included U.S. venture capital firm Sequoia Capital, which last year raised about 1 billion yuan for its first yuan-denominated venture capital fund to focus on small China deals.
• Blackstone signed a memorandum of understanding with the Shanghai local government on the fund's creation during a signing ceremony on Friday.
• The Financial Times, meanwhile, reports the private equity arm of Goldman Sachs(GS), in addition to Blackstone, is establishing an investment company in China to raise renminbi funds from local investors and take stakes in local companies with Chinese partners.

Next, the debt...

• Blackstone Group LP (BX) sold $600 million 10-year senior bonds Thursday, in a deal that was the first for the company and rare for private equity firms. Since 1995, only $19.4 billion in corporate debt globally has been sold by 12 private equity firms, which include 3i, Allied Capital and American Capital Strategies, according to Dealogic.
• The notes, issued through its subsidiary Blackstone Holdings Finance Co., yielded 6.73%, or 312.5 basis points over comparable Treasurys, a person familiar with the deal said.
• Blackstone, the first major U.S. private equity firm to become publicly traded when it listed in June 2007, announced plans for the bond offering on Wednesday and said proceeds would be used for general corporate purposes. (that's so vague)
• "This step of tapping the public debt markets is further a sign that Blackstone is drifting more towards the investment-banking model of debt issuance, only without the sales and trading," said James Lee, senior fixed-income analyst at Calvert Asset Management.

That last point is ironic considering a year ago at the time, that model was deemed "dead" and it only survived due to the U.S. government stepping in to support Goldman and Morgan. Oh dear irony. As an investor we can only wish Blackstone Group also gets too big to fail so that if anything goes wrong down the road, fellow citizens can backstop the company. I say that only slightly tongue in cheek, because that is the culture we have now told the titans of finance will be the landscape going forward.

[Aug 6, 2009: Blackstone Group Beats, But Already Ran into Earnings]

[May 7, 2009: Blackstone Group Narrows Loss]

[Mar 31, 2009: Bookkeeping - Starting Blackstone Group]

Long Blackstone Group in fund; no personal position

Comments

[auto44:]

vc folks make most of their money by using stockholders as patsies. Usually loading a purchsed company with debt, taking the money for the offices and then selling the debt ladden company back to the public hang with them and you'll get stung.

Aug 18 08:53 AM

[Zachary Sch...:]

Actually while it may be considered shady, that business practice ends up putting serious capital in the hands of (Blackstone) shareholders. As owners of the stock, you participate in both the management fees as well as the incentive allocations from these transactions.

So when Blackstone takes their investor's dollars (not BX shareholders, these are investors in Blackstone funds), borrows additional capital (The fund borrowing - usually not a liability for BX shareholders), buys out a company at $500 million, and then sells it for $2 billion a year later, shareholders actually receive somewhere in the neighborhood of $300 million in incentive fees.

This is what will likely drive the stock higher in the next few quarters. There are plenty of opportunities to buy distressed assets and Blackstone has the capital to put to work.

Now not every deal will have this kind of return, but again, the majority of the risk is borne by the investors in the Blackstone FUNDS - not by shareholders of BX

zachstocks.com

Aug 18 09:19 AM

[john s. gordon:]

shady operations - anybody here remember charlie bluhdorn & his convertible subordinated debentures? great way to raid a company that has too much cash on its balance sheet.
they sure did a number on new jersey zinc.
the palmerton PA waste pile turned into a superfund site - a big superfund site.
> jack

Aug 18 09:25 AM

[ain't no fo...:]

There has been very little reason to put up with the immature cetin annoyances, but in and of itself it wasn't the end of the world, and so I have complained to management and then kept on posting.

Recently, however, I've been getting virus and spyware warning messages and actual screens popping up trying to hijack my PC and force it into doing virus scans. They appear randomly when I access different articles on this site. They've been happening off and on for a week or two, no rhyme or reason to when they occur. They do not occur on any other programs of the hundreds I access weekly.

I have no idea whether others are receiving similar stuff but I have no interest in subjecting my system and my records to crap like that.

Hence, I will not be contributing comments to this site anymore - its just not worth it.

I've enjoyed reading and participating in what have usually been serious subjects and discussions that have taken place here, and I've developed respect for a number of authors and commenters, like swashbuckler, john gordon and trader mark, etal.

I wish you all good fortune on your investing and personal lives... and as the sarge used to say in Hill Street Blues, "Be careful out there!" because we are far from home and there are many miles to go before we sleep.

Aug 18 11:39 AM

[TraderMark:]

You wont believe this but I AGREE with you
I have written the exact same things in my blog

If you want an eye opener on how PE works this Burger King piece in BW in 2006 opened by eyes

www.businessweek.com/m...

But guess what - think of a leech and its host. The companies they buy are the hosts. PE firms are the leech. I am investing in the leech. I think the whole system is broken because they often take good companies, layer them with debt and then sell them off (of course taking massive fees for the honor)

But that is American capitalism ... since I dont invest in Goldman Sachs for moral reasons this is the next best thing to the gig that Goldman has. And since this type of capitalism is "celebrated" in America I guess I can sleep at night. All I need as a BX investor is for the leech to prosper... if its host companies die once they are IPO'd or spun off, well you need to ask bigger questions about our system in regards to that.

As long as new suckers are born each day, i-banks and PE firms win.


On Aug 18 08:53 AM auto44 wrote:

> vc folks make most of their money by using stockholders as patsies.
> Usually loading a purchsed company with debt, taking the money for
> the offices and then selling the debt ladden company back to the
> public hang with them and you'll get stung.

Aug 18 12:37 PM

[Alan Young:]

Mark, I'm in synch with you: I saw the headline about the private equity deal in China, and bought a 1% stake @ $13 after only a cursory glance at the fundamentals--and the chart of course. This looks like a great opportunity, especially with the fine dividend.

On the technicals, I think you're missing something when you say you want the price to go lower. On a 1-year (or 2-year) chart, you see a big cup-with-handle formation that has just been completed. A price drop from here (especially below the support around 11.90) implies a failure of the pattern, and a long sideways slog to build a new base. Instead, it should get above 14 quickly and continue up from there, with a target of 24.

JMHO.

Aug 18 02:05 PM

[predictorma...:]

Trader Mark-

We are weirdly aligned today.

That BW article was totally eye-opening for me. Normally business analysis (or story) never is that thorough and that well written. Too bad about BW, though. A shadow of its fomer self and I am letting my subscription run out after getting it for 15 years. They would never have a story that good now.

I bought and sold BX twice since April. As a believer in a market pullback in the next couple months, I think I will be back in it again.

I have done the same with FIG. Any thoughts about that vs.BX?

Invest in Leeches! It's a new trading motto.

PS Anyone remember Meshulam Riklis? Now he was a REAL leech. Here's a short bio

Reclusive billionaire Meshulam Riklis pioneered the leveraged buyout and junk bond transactions, and developed a remarkable knack for complicated paper trades between various companies under his ownership, which critics have claimed made his debts disappear at opportune moments

Aug 20 03:08 PM

[Peter_B:]

Thanks for the info. I've been trading it and FIG since March. Sounds like I should plan on holding some a while.

Aug 20 04:08 PM