kirkwalsh.com

If you're new here, you may want to subscribe to my RSS feed. If you have any questions, please see my policies page or if you would like to contact me, you can do so here. You can find out more about me here. I sincerely thank you for visiting!

The big news in the financial markets this morning is the proposed IPO of Blackstone, the uber-private equity firm. Many market analysts are drooling over getting a look at Blackstone’s operations, which have essentially minted cash for the firm in the past few years. Media outlets have reported that the average Blackstone analyst has generated nine times more profits than the most profitable investment bank (Goldman Sachs, naturally).

Investors are looking to get in on the private equity action without having to be an accredited investor. Like I said, Blackstone has been able to mint money the past twenty years or so. Since 1987, Blackstone’s private equity funds have averaged a return of 23% per year after fees. Their real estate holdings have averaged a return of 29% per year since 1991, when they began buying real estate.

Those numbers are simply eye-popping. However, anyone looking to get an idea of how Blackstone does what it does will be sorely disappointed. Investors will essentially be buying sight unseen. On Page 62 of the S-1 (as pointed out by Footnoted), investors will have limited voting rights and no right to select management of the firm. Basically, you’ll be buying the right to profits and hoping for the best.

The bigger question is why private equity is going public now? My guess has something to do with the flood of money coming into these entities. Returns are likely to drop in the future as they have to put more money to work (internally generated funds as well as new money). People are throwing money at them begging them to take it. This is a chance for senior management to cash out. When senior management wants to cash out, I start to worry. Especially for an entity that has so avoided the limelight and tried to keep its financial information so secret.

Part of the allure of being purchased by the Blackstones of the world is that management generally makes out like bandits with ownership percentages and payouts. I doubt that the managers at Blackstone would cash out unless they expect returns to drop and they have decided now is the best possible time to maximize their payout. I certainly don’t blame them for that, but I don’t necessarily want to be on the other end of the transaction.

I think this is a buyer beware transaction, but I highly doubt Blackstone will have any trouble finding buyers for the $4 billion in shares they are selling to the public.

UPDATE: Marketwatch points out another issue with the investment. It’s structured as a limited partnership, which means that your share of income will be taxable whether or not you actually get any cash from them. Because of the complexity of the business, Blackstone estimates that they will not get the Federal K-1 to investors in time for them to file their returns and all Blackstone investors should plan on filing Federal and State extensions every year they own a share of the firm. It’s not a big deal if you are holding the shares (they should be called “interests”) in a tax deferred account or if you are used to owning partnerships, but for the general public it could get confusing.