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 (NYSE: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. (NYSE:GS) and Morgan Stanley (NYSE:MS)) trade at an average of only 10x 2008e earnings, while asset managers like T. Rowe Price (NASDAQ:TROW) and Franklin Resources (NYSE: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.]