Blackstone IPO May Signal Private Equity Top - Barron's

Annotated article summary from this weekend's Barron's. Receive all our Barron's summaries by signing up here:

Top of the Market by Andrew Bary

Summary: Despite the many parallels one might draw between Blackstone's Thursday IPO and that of Google in 2004, "Blackstone isn't another Google." Despite a strong IPO ($31/share, at the high end of its range) and warm market reception (it closed Friday at $35.06), Blackstone (BX) may well disappoint. An unstoppable stock market has made persuasive buyout targets scarce, forcing firms like Blackstone to pay higher ratios and take on greater debt -- just as interest rates are mounting a charge. At $35, shares trade at 32x 2006 earnings (or 20x rumored 2008e profits of $1.75), 5x book value, and 43% of assets under management. The biggest I-banks (such as Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS)) trade at an average of only 10x 2008e earnings, while asset managers like T. Rowe Price (TROW) and Franklin Resources (BEN) fetch about 18x 2008e. Blackstone's high fees, which account for most of its earnings, may be unsustainably high. And a little-noted "clawback" condition could force the fund to refund 20% incentive fees if future investments sour. Its favorable perception of its real estate portfolio seems unrealistically rosy: it still owns half of $39 billion Equity Office Properties, while REIT stocks have fallen 20% since its February purchase. Barron's says the IPO may signal a top for private equity; shares might only be worth mid-20s.

Related Links: The Blackstone Book • Is Blackstone Getting Ready to Open IPO Floodgates? • John Hussman: Problems With Private Equity, Blackstone? • Barron's Blackstone IPO Cover Story: Crystal Ball or Tabloid? [24/7 Wall St.]

Comments

[Rich4REITs:]

Absolutely right!! The high gearing fuel the power of M&A for PE. To see what GE's growth exactly is. The ROCE has been increasing parallel with ROE during Jack era. When there is less target for M&A, no more fuel or expensive cost for that will stop the M&A machine stopped.

2007 Jun 24 08:53 AM

[Lisa:]

The i-banks trade at a lower PE than the asset managers because the i-banks' earnings are more cyclical. By that argument, Blackstone should trade at a higher PE than the other asset managers because it does better when valuations are depressed in a down market.

2007 Jun 24 04:57 PM