Blackstone Going Public? Watch Your Wallet, Brothas

Though late to the party in writing about this "happening" (see NYT, WSJ, FT takes), I have just a few things to say:

• That this was coming was obvious, obviously;
• 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.

I love Blackstone as a business and I love the people running the shop. They just don't get any smarter. From Steve to Tony James to Tom Hill - these guys are all rock stars and have built a true institution of "A" players. They were early to the private equity game. They mixed in advisory with principal work like nobody else. They started an institutional-quality alternative asset management business (see Hill, Tom, ex-of CS and Lehman) run by a top banker, very early in the game. BAAM is now a respected custodian of monies for top institutions worldwide. So, diversified cash flows. 20 years of history. Constantly looking to push the edge of the envelope, either in its existing business lines (see fund, Biggest, and deal, Biggest) or new business lines (BAAM's broadening strategy leveraging its core competencies). A high profile, massively-connected leader (see Schwartzman, Steven). Kind of sounds like Microsoft. Nah, just kidding.

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.

Comments

[Justin Lam]

Just discovered that trackback doesn't work on my system.....below is a link to the Chinese version of the post.

http://yeeyan.com/articles/view/1203/811

[howard Lindzon]

wall street is a beuatiful thing

[Yaser Anwar]

In my opinion, when they started "retail-izing" themselves, after bashing being public and how Sarbux is "evil", its just to make a quick buck and raise some funds.

You won't be surprised to hear that its also a way to make the big bulge brackets happy by throwing fees to them and strengthening the relationship.

"Keep your friends close, enemies closer."- Sun Tzu.

[Roger]

Ben, I love your clarification. Thanks for writing.

[Ben Tanen]

Roger, great post and I agree. One thing you don't QUITE spell out about the scrutiny, which may also be part of the thinking, is as follows: "The level of scrutiny of PE motivated by concern over our large-cap buyouts is going to increase anyway, so the incremental pain of being public is much less than before. Plus, we can make it in the public market investors' interest to be aligned WITH us instead of against us if we are ourselves public."

-Ben