Friends, fellow denizens of the investment world, you could have predicted this , right? Right? Frenzy rapidly pushing up Blackstone's (NYSE:BX) stock price, followed by fear, generating a painful decline in stock price.
This has nothing to do with the quality of Blackstone as a firm, of course. BX is great, as I've written many times. However, its valuation and price move out of the blocks was in cloud cuckoo land, putting the stock in a position where there was only one direction in which it could go - down. Why didn't market participants see this coming? We all saw how Fortress (NYSE:FIG) traded, and that wasn't a surprise, either.
We saw how Blackstone rushed to get the deal out the door given the risk of changing tax legislation relating to carried interest. This was all in the public domain. And finally, you had my post on Blackstone from March 18th where I laid this all out pretty clearly:
I have just a few things to say:
That this (the Blackstone IPO) was coming was obvious ; It was also obvious that the offering will go out at and get bid up to a stupid valuation, just like Fortress (e.g., let the flurry of excitement subside, let the stock settle down to a reasonable valuation, and buy then. For proof see FIG, IPO and aftermath); This has 99% to do with monetizing Steven and Pete's stakes and perilously little to do with succession planning, creating "institutional permanance," or any of the other excuses commonly given for listing (and I think they were more valid in the case of Fortress, to be honest); Blackstone is a great business, likely a better and more diversified business than Fortress; Blackstone should, and will, trade at a higher PE than Fortress; As usual, Blackstone is a step ahead, letting someone absorb the IPO risk (Fortress) while quickly jumping ahead of other potential issuers (see Carlyle, KKR, Apollo, Citadel, etc.); and This is not a terribly good sign for either the private or public markets.
But really, what does this mean? Mostly that Steve is calling the top. Not an absolute market top, but a valuation top for his firm. Why?
PE is just getting so big. Too big. Too much liquidity. At some point in the not-too-distant future returns will degrade. He knows this. He is sitting the catbird's seat. He's smart. We're dumb. He's the deci-billionaire, remember? "The real and perceived growth of the Blackstone business will slow, so let's monetize it while we can extract the momentum from the market (read: dummies like us), right? And besides, guys, it's mostly my money, anyway." The public scrutiny of PE returns, its place in the market, and its adverse PR will only intensify. There is a real issue with the tax treatment of management fees - logic and reason implies that this may well change. Why not monetize these on a capital gains-tax rather than a ordinary income-tax basis? This is worth billions of capitalized market value. That whole issue of Steve's saying for the last 20 years "Being public sucks because of costs, complexity, scrutiny, etc." applies to everybody but him because, hey, now we're talking about his money and he wants it - now.
Am I cynical? No. Just realistic. God bless Steve, Pete and the rest of the gang. They've created an amazing amount of wealth for their investors. Now it's payback time. Let's just make sure that we dummies don't give them more than their due, because if it's up to them and their bankers, we will. Much to the chagrin of our wallets and our pride.
Well guys, you did EXACTLY what I told you not to do. And now it's time for the tears. Except for Steve, Pete, Tony, Tom et al, where it is Champagne all around.
BX since Friday's IPO: