Blackstone's (NYSE:BX) IPO was the greatest thing since sliced bread.
That is, if by "sliced bread," you mean "a malfunctioning bread slicer that just lopped off two of your fingers."
It's not like I don't like Blackstone. In fact, I think it's quite an impressive firm. But as I laid out in a previous article, I just don't think it's the kind of IPO that investors should be jumping all over right from the get-go. The price was high, the industry is peaking, insiders are being opportunistic, and similar offerings are in the works.
Many investors (including fellow Fool Seth Jayson) seem to have thought the same thing, as Blackstone's stock performance has been pretty dismal since the offering. After peaking at $38 on the first day of trading, it has steadily slid to a current price of $29.69, solidly under the offering price of $31.
Check, please!
The performance of Blackstone's IPO so far may call into question whether other private equity firms are going to follow suit as expected.
Specifically, Kohlberg Kravis Roberts has recently been making noise that it may pursue the IPO route, and it has reportedly hired underwriters Morgan Stanley (NYSE:MS) and Citigroup (NSYE: C). Given that the name KKR is nearly synonymous with "leveraged buyout," the firm would no doubt be attractive to potential investors.
Watching Blackstone get carried on a wave of hype into its IPO, only to fizzle in the first few days on the market -- not to mention the poor trading performance recently from fellow PE shop Fortress Investment Group (NYSE:FIG) -- may cause KKR to think twice. I'd think it likely that investors will start losing their zeal for these PE offerings once their portfolios start flashing a bit too much red.
For the love of money
Then again, this may not be nearly enough to derail plans from KKR, or other PE shops like Carlyle, TPG, or Apollo that may also be mulling an IPO. Some investors may be miffed at Blackstone's performance, but there may be plenty of others waiting in the wings to say why KKR or TPG is a different story. And we certainly know that if the Wall Street media machine can get behind an offering, it can likely get it as far as pricing and first-day trading -- and what more do the sellers really need?
One could also make the argument that Blackstone's IPO had some unfortunate timing. Though the S&P is up nearly 20% in the past 12 months, between the day Blackstone priced and today, the index is down. If the market starts heading back up a bit and Blackstone follows, institutional investors who are still holding the stock may start to feel a bit more sanguine about the Blackstone shares they're sitting on. After all, it's the institutional investors that KKR is going to be concerned about.
The Fortress IPO isn't all bad, either. Even though the stock has had some lackluster trading since its debut, it is still sitting at nearly 30% above the offering price -- still not a bad return for the investors who actually got in on the IPO price.
Still attractive
So even if market receptivity isn't quite as hot as when Fortress hit the headlines earlier in the year, an IPO still may be very attractive for some of the other PE firms.
The most obvious reason is that the PE industry as a whole has been doing well lately. Firms have been able to raise huge funds and use cheap debt to finance big deals, which add to management fees. The market as a whole has also been performing well, so it gives the firms more opportunities for investment exits. This all means more net income -- and more net income means a higher valuation.
Another great reason is that the firms going public have been able to do so with some pretty great terms. In Blackstone's offering, for example, the new "owners" of the company don't actually have any real voting power to be able to direct Blackstone in any way. For other firms looking to come public, it's likely pretty enticing that they can potentially sell part of the company without actually having to cede any real control.
Valuation, of course, is also up there on the list of reasons a KKR might still hit the public markets. At roughly 15 times 2006 net income, Blackstone's valuation was a significant premium to firms like Goldman Sachs (NYSE:GS) and Lehman Brothers (NYSE:LEH), which trade at just barely higher than 10 times trailing income. And this doesn't take into account any potential changes in taxation for the company. Even if the next PE offerings are done at a lower valuation than Blackstone's, they would still likely fetch a multiple above market.
The bottom line for Fools
This all brings us to the real meat of the matter -- what this all means for Foolish investors. I happen to think it's very unlikely that some of the best dealmakers out there would do any favors for the average public-market investor. Whether it's Schwarzman, Kravis, or Bonderman issuing the stock, I'm firmly in the camp that the offering wouldn't happen unless the valuation was very full, if not downright rich.
For most Fools who have a yen for finance, I think there are simply better financial stocks out there. For those who want finance and PE, I think that Goldman, which raised a massive $20 billion PE fund relatively recently, is a much better deal than the any Johnny-come-lately to the market.
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Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. The Fool's disclosure policy likes long walks on the beach and thrash metal that can peel the paint off a Coke can.
