As I posted earlier this month, Blackstone Group's CEO Stephen Schwarzman gave an interview to the Wall Street Journal with a compelling theme -- Schwarzman is the Napoleon of private equity. Napoleon-watch tracks his moves on the business battleground. Yesterday I predicted that The Blackstone Group (NYSE: BX) would close its first day of trading at $90 a unit. Instead, it's currently trading up a mere 14.9% from its offering price of $31.
It's a bit silly I realize to say that an IPO is disappointing which leaves its CEO worth about $8 billion. But there are a couple of reasons why this modest first-day rise bodes poorly for the stock and sector:
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Oversubscribed offering. The Blackstone offering was reportedly seven times oversubscribed. This suggests that Blackstone's underwriters could have raised the prices substantially without being able to fulfill all the orders.
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Poor opening day performance relative to Fortress Investment Group (NYSE: FIG). Fortress's stock rose 68% on its first day of trading in February 2007. This first-day pop may have inspired Blackstone to move forward with an IPO but Blackstone's offering seems to have been greeted with a relative yawn.
I think investors realize that not only does this offering suggest specific problems with Blackstone's offering but it sends a signal about the outlook for private equity. As I posted before, the Blackstone offering presents unit holders with complex tax accounting issues, a future of losses due to high compensation and amortization of good will, very little information about Blackstone's operations, no control over staffing, and no legal recourse in the event of problems.
And Blackstone's offering comes on a day when the overall market is down due in part to rising interest rates which make it much harder for private equity firms to make money. After all, private equity's skill is taking advantage of an economic loophole in the way bankers are compensated. Bankers get paid huge fees when they lend out money and are not penalized if a loan goes bad years later.
With low interest rates and a high tolerance for risk, it was an ideal environment for private equity to operate. But Schwarzman knows that those conditions are likely to deteriorate and the time to get out is before that change becomes obvious to everyone else.
Today's disappointing outcome suggests that he overestimated how far ahead he was of the greater fools who buy into the Blackstone offering.
Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned in this post.
