If you're reading this right now, it's likely that you are thinking about buying into the Blackstone (NYSE:BX) initial public offering, have already bought into the Blackstone IPO, or got here by closing your eyes and blindly clicking around the Fool.com website.
Discounting the latter group for the moment, it's likely that many individual investors are asking themselves today whether they should be hopping on board with Blackstone's $4 billion IPO. While I have a high regard for Blackstone and think that it could be nice to own a piece of its business, I think investors need to keep a few things in mind when considering whether to be a Day One buyer.
Ladies and gentlemen of the jury ...
I'd like to present to the jury Exhibit A: Fortress Investment Group (NYSE:FIG). Back in February, Fortress, an alternative investment manager that oversees a group of private equity and hedge funds, priced its initial public offering. The offering came with a lot of fanfare, as Fortress was the first hedge fund manager to go public on the U.S. markets.
Like Alec Baldwin leaving an angry message, investors got a bit carried away. After the IPO priced at $18.50, it opened its first day of trading at $35 and spiked as high as $37 on that first day before closing at $31. Let that sink in for a moment -- the high for the day was $37 and it closed at $31. Those unlucky investors who jumped in at $37 on the first day because they thought they were about to miss the greatest thing since the Snickers bar finished the day down 16%.
Even worse, the stock has traded down since then and now sits at $25.88. That's still a really nice 40% gain for the institutional investors who got in at the IPO price, but a 14% loss for those who bought at even the lowest point during that first day of trading.
How unique is the product?
One of the reasons investors pile on the way they did with the Fortress IPO is because they're worried about missing out on a one-of-a-kind opportunity. Nobody likes feeling like they missed out, right? Well, the bankers sure love it when a buzz is created around one of their IPOs -- a great first day of trading makes their institutional buyers happy, and when the institutional buyers are happy, the bankers get more business.
In the case of Blackstone, the product (a.k.a., the shares of stock) is not really all that unique. For one thing, we already have a pure-play alternative investment manager available for investors -- we just talked about it above. Although much of the hype around Fortress involved the hedge funds it manages, $17.5 billion of its $29.9 billion of assets under management (AUM) at the time of its IPO were in its private equity funds. In fact, Blackstone actually has a smaller percentage of its total $88 billion of AUM in corporate private equity funds than Fortress does.
We certainly can't overlook the bulge bracket investment banks in this discussion, either. Blackstone has three primary streams of income: asset management fees, profits from its principal investments, and fees from its financial advisory segment. Sound familiar? In 2006, Lehman Brothers (NYSE:LEH) brought in $921 million in financial advisory revenue and managed $21 billion worth of alternative investment funds. Goldman Sachs (NYSE:GS) managed a whopping $145 billion in alternative funds at the end of 2006 --which doesn't include the enormous $20 billion private equity fund that it raised earlier this year -- and raked in $2.6 billion in advisory fees. And with both of those firms, you get much more than just advisory and alternative asset management.
Barbarians preparing an IPO
To top it all off, reports yesterday said Kohlberg Kravis Roberts has gone ahead and hired Morgan Stanley (NYSE:MS) and Citigroup (NYSE:C) as underwriters for an upcoming IPO. For all the strength of Blackstone's brand and the hype the firm has gotten since announcing its IPO plans, KKR is its senior by nearly a decade. In fact, when KKR was stealing the nation's attention with the $25 billion buyout of RJR Nabisco, Blackstone was still a relative baby, having been founded just three years earlier with $400,000.
Not only would a KKR IPO potentially steal some of the attention away from Blackstone, but these erstwhile barbarians could further open the floodgates for other funds to come to the public markets. There are plenty of major funds still out there that could flood the market with newly issued shares, including The Carlyle Group, Warburg Pincus, Bain Capital, TPG, Silver Lake, and Apollo -- just to name a few.
Patience is a virtue
My suggestion? Take a deep breath, remove your finger from the "buy" button, and don't allow yourself to succumb to the hype. (I'm fairly sure there will be more articles about Blackstone's "amazing" IPO today than there are B-movies starring Ice-T.)
Don't write off Blackstone completely -- it's a fine company, and in the long term it should do quite well. I just think that there will be better times to buy in the future.
A final thought
In what was probably the last Wall Street IPO on the scale of Blackstone's, Goldman Sachs raised $3.7 billion back in May of 1999. With the company's strong brand and storied history, it's not hard to imagine (or recall) the excitement around its IPO.
Goldman's IPO priced at $53 per share and opened its first day of trading at $75.59. In the ensuing years, investors put up with a good deal of volatility -- only to find themselves at right around $65 in March 2003. That's right, just about four years and those who bought on the open had a 14% loss to show for it.
Now, I know what you're thinking: That was during the dot-com boom and bust, and it was a much different time. While that's certainly true, I think it's important to ask yourself why such a savvy finance firm would be selling right now.
Those who do steer clear of writing the "buy" ticket for Blackstone stock can find plenty of great financial stocks on The Motley Fool's CAPS rating service.
Fool on!
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Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. The Fool's disclosure policy has never been to one of Stephen Schwarzman's dinner parties, but it sure wouldn't mind an invite.
