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.]