Blackstone Almighty

While institutions and rich folks have feasted on private equity over the years, now it's finally time for the average Joe to get in on the action with the mega IPO of Blackstone. On the first day of trading, the shares of the private equity firm surged 17.5% to $36. But when top players are taking money off the table, is it really a good time to buy in?

Blackstone is an investment firm that focuses on buying companies. While other firms like Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) and GE (NYSE: GE  ) do the same thing, Blackstone's strategy has some big differences.

To finance its acquisitions, Blackstone uses a considerable amount of debt financing. With low interest rates and heavy amounts of liquidity in global markets, it's been fairly easy to borrow money. Blackstone also tries to liquidate its portfolio companies within two to five years. As long as these companies generate enough cash to pay down debt, Blackstone can rack up juicy returns.

That's been the case over the past five years. During this period, Blackstone's earnings have surged from $39.4 million to $2.26 billion.

But can the pace continue?
If history is any indication, booms have a finite time limit. As for private equity, there have been several implosions, such as during the late 1980s.

This time around, there are some ominous signs that the private equity party may be winding down. Last week, the Senate Finance Committee introduced legislation to double the taxation on private equity firms. It does have a five-year exemption for Blackstone, but there is talk on Capitol Hill of eliminating that.

The recent uptick in interest rates has been another problem. While it's still not enough to blunt deals, it could eventually be an issue if rates continue their climb.

Despite all this, investors are rushing into private equity. In the case of Blackstone, its corporate private equity assets under management have spiked from $7.6 billion in 2001 to $32.3 billion.

And investors are willing to pay a hefty premium for the growth. Blackstone's valuation is 17 times earnings and this compares to roughly 10 times earnings for rivals like Goldman Sachs (NYSE: GS  ) and Morgan Stanley (NYSE: MS  ) .

A key factor for the premium is that the only other publicly traded private equity firm is Fortress Investment Group (NYSE: FIG  ) . But according to a Wall Street Journal story, it looks like KKR is in the early stages of filing an IPO, and that TPG, Apollo, and Carlyle are thinking of going public.

By the end of the year, there could be a lot of private equity shares on public markets, and that may water down valuations. So, Foolish investors, you might want to bide your time on Blackstone.

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Berkshire Hathaway is an Inside Value recommendation. Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked 1,831 out of 30,414 in CAPS. The Fool has a disclosure policy.


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