Thursday, March 22, 2007

Followup on Blackstone IPO coverage

In an earlier post, I commented negatively on the prospect of an IPO by Blackstone Group. It seems I'm not the only one who has questions about this deal. David Weidner at Marketwatch has a lot of questions. He says

"Since the news broke late last week, journalists, analysts and bankers have been trying to justify why Blackstone would need or want public ownership in any form. The consistent explanations are that stock would allow executives to "cash out," would provide another means of compensation and would give the firm another currency to use in deals. Sounds pretty weak. Even if one accepts those justifications, public ownership will bring a lot of anguish to the firm: disclosure of financials, earnings expectations for a business where returns are known to be uneven and the prospect that a once-autonomous management that did what it pleased, when it pleased will now have to answer to the hoi polloi of outside investors."

Allowing the executives to cash out just means that they are looking for some chump to trade cash for paper. Plus, the points that Weidner makes about the limitations that come from public ownership show that a public "private equity" firm would have its flexibility and opportunities for exploiting market inefficiencies eviscerated.

The big kicker is this: "The firm's plan for public ownership also smells of hypocrisy. Schwarzman and Blackstone executives have been wooing small- to medium-sized public companies like Montecito, Tragus, Center Parcs and TeamHealth into the private fold by telling CEOs and managers that by going private they would throw off the shackles of shareholders, regulatory filings and Sarbanes-Oxley compliance." Avoiding the tightened regulatory environment has been a primary rationale for going private. I agree with Weidner 100% here.

Update: found some more commentary by Roger Ehrenberg at SeekingAlpha: A couple of his comments, which I agree with, include

In my earlier posts on Blackstone and KKR, I made it pretty clear that their steps - going public and creating lower risk, lower return investments - are a foreshadowing of what's to come: namely, a much tougher environment for private equity.

These difficulties will emanate from several sources, principally:

  • Less friendly debt markets (both higher rates and tougher terms);
  • Fewer attractive buy-out candidates;
  • Too much liquidity across the alternative investment landscape (PE, HF and large VCs); and
  • Greater regulatory scrutiny"
  • and "Too much liquidity can cause perverse decision-making, and the brash and brainy private equity financiers are only too willing to take advantage of this market anomaly (that is, the inadequately-priced risk that is willingly underwritten by sheep-like investors awash in cash)." Amen, brother...

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