Blackstone Successfully Plays Both Sides of the Market

Oct.12.09 | About: The Blackstone (BX)

The Blackstone Group LP (NYSE:BX) is cashing in. The private equity company which manages alternative investments for affluent and institutional investors is apparently ready to begin selling some key positions. Recent market strength has been a boon for existing private equity investments and may provide an attractive exit point for several timely purchases made by individual fund managers.

Investors in funds managed by Blackstone received a letter on Friday explaining that the company was close to listing eight of its portfolio companies. Typically this type of transaction is very lucrative for private equity firms as well as for investors in their individual funds. Listing these private positions on the market allows Blackstone to mark these investments to a legitimate market value which in turn allows them to book a realized (and unrealized) profit on the position. Since the majority of Blackstone’s income comes from incentive fees tied to profitable trades, listing its positions through an IPO transaction can immediately raise profits for the parent company.

When listing new positions, Blackstone will likely only sell a portion of the individual companies to the market, keeping the majority of these companies closely held. This allows management to continue to act as a majority owner and ensure proper decisions are made which foster long-term growth. That growth should allow Blackstone to sell the remainder of its position gradually over the course of several quarters or even several years – booking even larger profits throughout the process.

Investors in these early stage IPOs should do very well with an attractive risk/reward scenario. Blackstone has a very strong incentive to make the IPOs work to the buyers' advantage, because the private equity firm will continue to own the majority of the stock. If a new IPO is listed at $18 and immediately trades to $21, investors will be satisfied with their return which will make marketing the next IPO that much easier. Blackstone should not be too concerned with missing potential profit by listing these shares too low because they will book the profit on the majority of shares still owned. The investor confidence and liquidity for future deals will more than offset the missed opportunity on the shares initially sold.

Private equity firms were hit particularly hard during the recession because investors worried that poor access to credit markets and dwindling values on existing investments would pressure profits and even cause significant losses. But institutional investors were quick to put money into the funds managed by companies such as Blackstone in order to achieve investment returns that were not heavily correlated to the falling market returns. The net result was that firms like Blackstone were able to raise significant capital at a time where the investment opportunities were the most attractive.

Now, several months into a market recovery, Blackstone is able to capitalize on these savvy investments and sell stock to an unwitting public which is clamoring for exposure to the rising market. Blackstone continues to have a hefty war chest of available cash to spend on opportunities, but now appears to be playing both sides of the market by selling partial positions and booking profits. Funds continue to accept new capital with a Chinese sovereign wealth fund making headlines by investing significant capital in a Blackstone fund.

Blackstone is up over $1 per share in early trading due to the positive news, and this rally puts the stock well above the $15 level which had been providing resistance for the past several months. A breakout above this level could be the first step towards retaking the IPO price in the low $30’s. I think investors could easily double their money over the next 12 to 18 months and potentially see even larger gains if Blackstone receives significant capital or reports significant success in the IPO transactions. Private equity opportunity is quite attractive and Blackstone is the highest quality player in this sector.

Full Disclosure: Author has a long position in the ZachStocks Growth Model.