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When fans of private equity talk about its advantages, they like to point to the benefits of being a privately-owned company rather than a public one.
No more shareholders to be constantly appeasing means an improved ability to focus on the long-term rather than a short-term, and means management has more time to think about the company rather than pandering to its owners.
It all sounds very convincing.
But in that case, why is Blackstone Group, one of the sector’s key players, about to go public?
Blackstone’s decision to go public, at least according to the prospectus, won’t remove the key benefits of being a private company. The group intends to ignore quarterly-earnings forecasts, and instead focus on the ‘long-term perspective’. Also, the way the company is structured means that shareholders (or ‘unit’ holders, if you want to be precise) have no voting rights – and therefore no say in how the company is run.
So the group aims to benefit from the money raised by a flotation without taking on the downsides of public ownership. Of course, one of the other things that private equity groups tend to complain about in public companies is the separation of ownership and management, yet, if anything, this will be even worse in Blackstone than in your average FTSE 350 stock, for example – but clearly this rule doesn’t apply to them.
The recent listing of Fortress Investment Group, the first ‘alternative investment firm’ (ie hedge funds and private equity) to list in the US, was a massive success, with shares doubling on the first day of trading. Blackstone may do just as well – with everyone keen to get a piece of private equity’s success, and the scarcity of investment vehicles that let ordinary punters (in the US at least) get on board, shares are bound to be in demand.
Rob Cox and Lauren Silva, writing for Breakingviews.com, reckon that Blackstone should be worth around $25bn, with a big chunk of the value coming from the 20% fees it charges on profits for the funds it manages. ‘But the real value of Blackstone – the first major private equity leader to go public – will be whatever investors bid the stock at. And in this liquidity-mad environment, that could mean the sky is the limit.’
But investors should be wary of how much longer liquidity madness can continue. Already this year, Bill Conway, co-founder of private equity giant Carlyle Group, has warned his staff to be more careful in choosing the deals they do. He acknowledged that the cheap money boom has been one of the main drivers behind the gains private equity has seen, and that it can’t go on forever. He also admitted that he can see no reason for the liquidity boom to end in the very near future, and expects it to continue for the next one or two years at least – but if a man like Conway is urging caution, it’s clear that the industry as a whole must be getting jittery.
A big part of private equity success is about having a profitable exit strategy for the investments you take on. It looks like picking the exact right time to go public could be the best exit Blackstone has ever pulled off.
As Steve Pearlstein puts it in The Washington Post: ‘The reason why Blackstone is considering going public is simple: it’s at market tops like this that dumb money will overpay. The smart money is getting out while it can.’
Turning to the stock markets…
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In London, stocks ended the week in positive territory as continuing bid speculation boosted the likes of Pearson and Barclays. The blue-chip FTSE 100 index closed 21 points higher, at 6,339. For a full market report, see: London market close.
Elsewhere in Europe, the Paris CAC-40 closed 36 points higher, at 5,634, whilst the Frankfurt DAX-30 ended Friday at 6,899, a 42-point gain.
Across the Atlantic, US stocks closed moderately higher as investors pinned their hopes on a Federal Reserve interest rate cut. The Dow Jones ended the day 19 points higher, at 12,481. The S&P 500 closed 1 point higher to end the week at 1,436, registering its biggest weekly gain in four years. However, the tech-heavy Nasdaq fell 2 points to close at 2,448.
In Asia, markets were boosted by a spike in the price of oil, with the Nikkei closing 41 points higher, at 17,521. In Hong Kong, the Hang Seng had risen 101 points to a close of 19,794.
Crude oil was over 1% higher, at $62.93 this morning. In London, Brent spot had climbed to $63.79 a barrel.
Spot gold was last quoted at $658.00 this morning and silver was at $13.20.
And in London this morning, George Wimpey and Taylor Woodrow announced merger plans which will see the creation of Britain’s biggest homebuilder. Estimates put the market value of the new entity at at least £5bn. Shares in Wimpey had risen by as much as 19% in early trading, whilst Taylor Woodrow’s stock was as much as 17% higher.
And our two recommended articles for today…
Can this stock market rally last?
– Markets may be rallying at present, but they are still long overdue a 10% correction. For John Robson and Andrew Selsby’s reading of when the key indicators suggest it might come, see: Can this stock market rally last?
Has the Dollar met its date with destiny?
– Jeremy Batstone is concerned by a dangerously complacent attitude towards the Dollar: just because its always been strong doesn’t mean it will stay that way. To find out why we could be about to reach a major turning point – and why a Dollar fall wouldn’t be all bad news – read: Has the Dollar met its date with destiny?