Valuing Blackstone

I haven't had a chance to dig into the nitty gritty of the forthcoming Blackstone IPO, but I was a bit surprised to read that it's expected bust out of the gate at about 25x earnings.  Private equity is, it goes without saying, tres sexy right now,  but this still seems a tad rich.  Here's a few scattershot reasons why this seems so.  First of all, 25x is way higher than its Wall St. rivals.  You can pick up Goldman Sachs for 11x earnings right now if you want, a way more diversified firm.  Relative valuation notwithstanding, there are a number of other factors that you'd think would drag down the multiples.  Higher interest rates, for example, always lead to multiple contraction, but at Blackstone you'd think it would be a double whammy, since it's totally dependent on borrowing.  Then there's the whole tax issue.  If you haven't heard that Congress may be looking to close a tax loophole used by PE firms, then you're living under a rock.  There's also the stock market in general, which is still near multi-year highs.  You have to figure that the stellar performance of the market over the past few years has made the business of flipping companies a helluva lot easier.  The market may rise yet, but there's no guarantee that the next few will look like the last few -- certainly you can't assume so. Another elephant in the room is excess liquidity -- as everyone knows, outsize PE returns have attracted tons of cash, all of which is searching for fewer and fewer deals.  To say nothing else, this makes producing good returns harder than it has been in the past.

So in light of these various drags, yes, it's a bit surprising that Blackstone may be valued so richly.  It should be interesting to see whether this one captures the imagination of retail investors, a la the various tech IPOs that have been shooting up in recent days.

Comments

[Daniel]

Agree with everything you've said. At the same time, it seems like almost everyone can easily name the reasons Blackstone's IPO will be a dud.

Reminds me of Google's IPO.

There are reasons why it could turn out to be a value, even at 25x earnings. I won't be buying in, and probably won't even kick myself for not doing so if it heads higher, but I won't be terribly surprised if Schwartzman surprises the market fresh out of the box--and the stock does very well.

--DW