Bloomberg News reports that Blackstone Group (NYSE: BX) missed its profit forecast and it's stock is likely to open 29% below its $31 a share IPO price. The culprit was a 44% drop to $109.1 million in Blackstone's real estate revenue -- it is blaming subprime for a decline in its commercial real estate lending.
In August 2006, I began to post on the idea that private equity was peaking. And I got into an interesting debate on the topic on CNBC this February. So today's announcement on Blackstone's earnings miss does not come as a huge surprise. Blackstone missed analyst's estimates by nine cents a share -- profit excluding some compensation costs dropped to $234 million from $239.1 million in 2006. On that basis, profit was 21 cents a share -- 9 cents below analysts' 30 cent average estimate.
There was some good news though. Revenue in the corporate private-equity segment jumped 42% to $227.3 million on higher fees. Revenue in the alternative asset-management segment, built on hedge funds, surged 88% to $124.9 million with more fee-earning assets under management. Financial advisory revenue went up 60% to $84.3 million.
Nothing like seeing billionaires have a hard time. But that's the case with big-time private equity kingpins, like KKR's Henry Kravis.
Despite being the pioneer of the industry, KKR was a bit late to the IPO feeding frenzy, with arch enemy Blackstone (NYSE: BX) snagging the riches.
Interestingly enough, KKR had to report some of the misery in an updated IPO filing (which is the first amended document).
If you look at page 30, you'll find the following:
"For example, the cost of financing leveraged buyout transactions by issuing high-yield debt securities in the public capital markets has recently increased significantly. If conditions in the debt markets do not become more favorable to us in the near term, we may need to rely on financing commitments provided directly by investment banks or other sources in order to consummate pending transactions or finance future transactions. Such financing may be significantly more costly, with terms that may be significantly more restrictive, than financing that was, until recently, available to us in the public capital markets. More costly and restrictive financing may adversely impact the returns of our leveraged buyout transactions and, therefore, adversely affect our results of operations and financial condition. In addition, in the event of a prolonged market downturn, our business could be affected in different ways. Our profitability may also be adversely affected by our fixed costs and the possibility that we would be unable to scale back other costs within a time frame sufficient to match any decreases in net income relating to changes in market and economic conditions."
Yes, it's a bummer for an upcoming IPO. Just look at the horrendous after-market performance of Blackstone. In fact, despite a strong quarterly report, the stock had a tepid performance today.
And, if KKR does have troubles financing mega deals like TXU (NYSE: TXU) and First Data Corp (NYSE: FDC), we might see the next filing for withdrawal of the public offering. Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
It was certainly nice that Blackstone (NYSE: BX) had a strong Q2 with net income jumping from $224 million last year to $774 million. The stock is up over 7% in the pre-market.
The company's June IPO was highly anticipated and was viewed as a proxy for the health and financial success of private equity firms. It bombed. Shares fell from $38 to under $23 in less than two months.
But, the second quarter is not the number that bears watching. It was undoubtedly a success, but it came ahead of the credit crisis that has sucked financing for big LBO and private equity deals out of the market. Analysts are worried that the disappearance of liquidity in that buyout market could hurt the results of large financial institutions like Goldman Sachs (NYSE: GS) and Citigroup (NYSE: C).
Based on early trading, Blackstone's shares may make it back to $28 today, but to move back toward $38, the firm will have to prove that it can turn in another big quarter in a very bad environment.
Ok, if you bought shares of The Blackstone Group LP (NYSE: BX) for $38, you probably don't like the firm's leader, Stephen Schwarzman. Or, if you pay ordinary tax rates, you probably have some distaste. Oh, what if you got a pink slip from a company that Blackstone purchased?
I think it's a good bet that Schwarzman's popularity rating is dicey.
Yet, in the deal world, he should be in the Hall of Fame. In fact, in this Sunday's NY Times, Andrew Ross Sorkin has a piece that defends the controversial financier.
According to Sorkin, he thinks it was inevitable that we would learn about the shadowy world of private equity. So why not now?
What's more, Sorkin says that Schwarzman is not the only dealmaker who likes to spend money on luxury and parties. For example, he points to TPG's David Bonderman, who hired the the Rolling Stones for his birthday bash.
Of course, Schwarzman was smart enough to realize that there was a big opportunity to take lots of money off the table – and, as a result, make it more difficult for his competitors to do the same.
More importantly, Schwarzman has assembled a top-notch team and racked up stellar returns.
Basically, he is no different from any other top financier, which is probably why he has lots and lots of detractors.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
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.
It looks like The Blackstone Group (NYSE: BX) would have been much better off staying private.
Bloomberg News reports that Blackstone is responsible for two of the worst IPOs of 2007. The first one? Its own last month -- which tumbled down to $23.25 yesterday before rebounding to $25.70 right before the bell -- down 17% since going public. The second lousy IPO is that of Blackstone's travel website Orbitz Worldwide, Inc. (NYSE: OWW), which is down 14% from its July 17 IPO.
Two busted IPOs from Blackstone! As they say, pride goeth before the fall. And look out below.
While it seems like almost everyone who is "against" the private equity and hedge fund guys (especially those out of the money management business), few people actually try to change the way they do things. One such person who has is Congressman Dennis Kucinich.
Leading up to the Blackstone's (NYSE: BX) IPO, Kucinich tried to delay the company from coming public by working with the SEC and arguing that the move posed many dangers for the 'average investor.' While Kucinich argued that, because Blackstone is involved in the hedge fund/buyout business - a business that is regulated to only include high net worth investors - the average investor shouldn't be allowed to own stakes in these businesses. The problem with his argument in this case was simple - investors in the IPO aren't investing in Blackstone's funds, instead they are taking an ownership in the underlying business. Confusing these two things - investment in a FUND versus in the underlying BUSINESS - is a tremendous mistake.
However, Kucinich is not stopping there. According to DealBook, Kucinich plans to hold hearings on the future of private capital (hedge funds, private equity, venture capital, etc.). One could easily infer that Kucinich hopes to gain increased regulation on the industry in terms of both investment standards and ownership standards.
In my opinion, there's a deep issue here that Mr. Kucinich is confusing. While a business's operations might need regulation, perhaps deep regulation (think alcohol, tobacco, firearms businesses), the way in which the average investor can go about purchasing shares in a company should not vary as long as a businesses line of work is considered legal by law.
Negative sentiment from earlier posts today by Zac Bissonnette and Peter Cohan towards private equity can also be detected in this week's Economist, in different ways. Zac's post discussed the negativity displayed in the Moody's report, which discussed the firm's belief that private equity firms don't have a long-term time horizon when making investments. Peter's post opined on the Moody's report and referenced an older post he wrote with points that are still very relevant today. For example, the fact that money seems to be flowing in PE funds at a rate that can't be maintained much longer. I recommend readers check out both Peter's and Zac's posts.
Still more bashing? Well, yes. In this week's Economist, the "Leaders" section AND "Briefing" section joined in on the bashing.
With higher interest rates and pushback in the debt markets, it's been tougher for the private equity folks to get deals done. Just look at the recent IPO of the Blackstone Group (NYSE: BX). The stock has been, well, like a stone.
But, according to this week's Barron's [a paid service], this may be an opportunity. That is, there may be a way to arbitrage returns.
Huh? Well, many deals have a spread between the buyout price and the current stock price. Why? Since a deal has not been closed, there's a risk of a deal falling through.
With the recent general problems in private equity, there's been a widening of spreads.
These firms have top-tier private equity sponsors. And, in terms of reputation, it would not be good for them to walk away. So while the financing costs may be higher, I still think private equity firms will work pretty hard to get these deals done. Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
While the over-hyped Blackstone Group (NYSE: BX) IPO has proved to be mostly lackluster, it still looks like KKR is gunning for an IPO (hey, Blackstone's valuation is still at nosebleed levels).
According to a report in TheDeal.com [a paid service], KKR has initiated the process of becoming a broker dealer. This means the firm will be able to buy and sell securities (and generate commissions on the transactions).
Keep in mind that Blackstone has had this license for a long time because of its advisory business.
But, the license allows for other lucrative businesses, such as IPOs (where the fees have remained juicy). No doubt, it's been good to such financial powerhouses like Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS).
So, at the end of the day, we may actually see KKR and Blackstone become like the other diversified financial players. And, at the same time, the traditional financial firms will try to look more like Blackstone and KKR.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
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.
This morning I posted that The Blackstone Group's (NYSE: BX) IPO was close to breaking below its initial offering price. And today, it happened -- Blackstone's master limited partnership units currently trade 13 cents below its initial offering price of $31.
One reason could be that the market for lending to private equity appears to be cooling off. According to The New York Times [registration required], one recent deal was unable to raise the amount sought. Thomson Learning, a former division of the media publisher Thomson Corp. (NYSE: TOC) is seeking $1.6 billion -- $540 million less than the $2.14 billion it initially requested for a private equity financing of its management takeover.
Moreover, lenders are no longer as willing to accept potentially worthless payment-in-kind financing -- which pays back a loan in the form of more debt. For example, Thomson needed to eliminate a $540 million provision for a pay-in-kind toggle, a type of debt that allows interest to be paid in cash or with the issuing of more bonds. The entire offering must now be paid back in cash, and Thomson Learning agreed to add more covenants -- which set strict requirements a borrower must meet to satisfy the lender -- to both the loan and the bond portion of the sale.
The point? The golden era of private equity may be over for this cycle. And BX investors don't want to stick around for the scary part of the movie.
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.
The Blackstone Group (NYSE: BX) has lost 7.47% of the value it created on its first day of trading. And it now trades a mere $1.44 above where it initially started trading last Friday morning.
There has been huge hype surrounding this IPO and I have gotten some grief for my role in that. DealBook, FP Trading Desk, and Felix Salmon were among the blogs that pointed out how far Blackstone's IPO closed below the $90 high I blogged about last week.
But for those who read my posts, I made it clear that I did not think Blackstone was a good investment for individual investors and that the master limited partnership units were poised to pop because the IPO was reportedly seven times oversubscribed. And after last Friday's disappointing performance it dawned on me that those oversubscription stories may have been fiction planted by underwriters to stimulate demand for Blackstone's securities.
But this has not stopped many media outlets from trumping the success of the Blackstone offering. For example Barron's cover story was A Score for Blackstone's Management. I usually respect Barron's coverage but this was a puff piece that glossed over the issues that concern me about investing in the company.
And with its price tumbling close to its initial offering price, it could quickly become a busted IPO.
With the IPO of Blackstone (NYSE: BX), there's been lots of talk about the eye-popping compensation of some of its key principals. In fact, Congress is thinking of imposing higher taxes on the private equity industry.
To get some perspective on things, I interviewed John Ryan, who is the president of RSMR Global Resources (which is a retained executive search firm). He has extensive experience with banks, financial institutions and private equity (PE) funds.
What's your take on the Blackstone compensation? Normal for private equity?
From what I have seen, Blackstone's compensation has been in line with other major city private equity firms. Blackstone has definitely been top quartile to attract the individuals they have been able to hire, most of their folks have top ten MBA's and bulge bracket investment banking experience.
In the world of individual investors, "Blackstone IPO" is a phrase that ranks right up there with "Amanda Beard photos" in overall sexiness and mystery. Will it be everything that we hope? we wonder, and the fact is, it probably won't. The IPO is due to price today after the market closes, and will start trading tomorrow under the symbol "BX" on the NYSE.
The thing that is problematic, as Peter Cohan has pointed out, is that the term "monetization" weighs heavier (and, for us, far, far less sexy) on the company's prospects than anything. The fact is: the firm isn't forecasted to make a profit for years so it can pay off its partners, for instance, chief despot and CEO Steve Schwarzman. Not just that, but individual investors will be subject to a variety of strange tax impacts, including the rather less-than-detailed reporting the company plans to issue and the possibility that legislation might create adverse tax consequences for the little guy.
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.
Meanwhile, Blackstone is clipping the fees of the advisors who will help take Blackstone public. Bloomberg News reports that the 17 banks taking it public will get a fee totaling a mere 3.6% of their fraction of the IPO amount -- $170 million -- a bit more than half of the 6.2% IPO fee average. But there's quite a bit of trading going on here. By giving every investment bank a piece of the IPO business, Blackstone is assuring that none of their analysts will criticize the deal. And then there's the promise of big fees down the road to help Blackstone finance and close future deals with its $19.6 billion fund. Blackstone paid $571.4 million in such fees in 2006.
Over the past week, it looked like there was trouble brewing for the upcoming IPO of Blackstone. After all, the Senate has been preparing legislation to tax publicly traded partnerships.
Then again, the tax will not take affect until five years. And, in the IPO world, that's is an eternity.
Well, it now looks like the Blackstone IPO is on the fast track and is slated to be priced on Thursday. This likely means the firm's shares will start trading on Friday.
Hey, maybe the fact that Congress is concerned is a telltale sign that Blackstone is a powerhouse, right?
It does look that way. So, expect lots of fireworks at the end of the week.
The proposed ticker for Blackstone is "BX." Also, click here to check out more details about the IPO.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
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