Since private equity Blackstone Group's IPO in June, (BX) shares have nearly halved from $35 to $18. Bulls cite strong management, cheap P/E of 12 times 2008 earnings, or $1.49/share, and a dividend yield of 6.5% in forecasting a return to $30 shares. But Barron's notes fewer leveraged buyouts, tighter credit markets and competition from cash-soaked sovereign wealth funds are likely to take a toll on Blackstone's earnings. Worse, the firm's incentive fees of 20% of profits—collected only if it continues to top 8% returns—could reverse themselves if the economy continues to weaken and deals fail. Blackstone's "claw back" bylaws will force it to return fees to investors. EPS could fall under $1.
Several Blackstone LBOs are already in trouble: The $17.5 billion buyout of semiconductor-maker Freescale has struggled under falling revenues and massive debt. The $26B buyout of Hilton Hotels appears to be ill-timed as hotel shares plunged during the ongoing housing slump. A tabled LBO of Alliance Data Systems (ADS) looks like it will collapse altogether. Though the firm's managed assets grew 40% to $103B in 2007, its size may not be enough to keep the buyout king's shares buoyant. Barron's foresees $15 shares.