Blackstone, albeit a tough one to value and relatively new on the public scene, seems to be receiving a level of punishment it doesn’t deserve. 8% dividend yield, almost $1 billion in cash on hand, ZERO long term debt, 16% annual revenue growth, selling at a 5% discount to BV, and 50% less than the IPO. I heard a high level of confidence from them on the conference call earlier this month, the dividend has been “guaranteed” for the next 4 quarters, no leverage, and minimal exposure to subprime. They have already written FGIC down to “pennies on the dollar”. Will someone please tell me what I am missing before a make a mistake…
I’m something of a buyer too… Edit: You need to be careful about the timing of this - there is uncertainty that the market currently hates.
Sure…timing will be key on this one, but my point is that the uncertainty doesn’t seem to have any basis. You being long eases my mind a little, but I am still overly confused as to why SO much hatred is being laid on this by everyone else. I think it is time to start dipping my toes in…
Freescale is doing terrible. Company could write this investment down dramatically IMHO. Lots of bad investment have been made by large PE in recent memories: Realogy, Freescale, that leveraged Caryles Fund (forgot its names). How confident are you that this is all behind us? Company is selling at BV. With bad investments, its consolidated ROE is likely to be low (just my hypothesis, no concrete calculation). Why would you pay more than Book Value for a company with terrible ROE. “Street” estimate is 90 cents for FY08, ~ ROE is 5% (assuming no write-down). Company has great long term value, but how long before you see those results? 2 years? 3 years? 5 years?
“Company has great long term value, but how long before you see those results? 2 years? 3 years? 5 years?” I just did today with my .30 per share dividend!!! After all…long term value usually is realized over 2, 3, and 5 years. You make some good points, but I have to disagree a bit. I calculate BV at 16.25 per share, and MV today is 15.30. You are making a comparison to PE mistakes recently, but BX stands out from them due to no leverage, proven track record, and solid balance sheet. Carlye was leveraged 30x. I guess my question is…is there legit concern about future earnings, or is the business model still to difficult to understand? I remember last year at this time everyone asking “How do they do that” referring to the billions they make. A year later, 9 months after going public, we are still asking the same questions.
I respect Steve Schwarzman so much that if he is selling i’m not buying… he sold BX @ 31. FV must be $8 or so.
BX doesn’t stand out from the rest of the crowd. Company has made mistakes (Freescale for one). BV can get cut easily if they have to write down the value of its investments. The company has already noted 2-3 investment that has not perform to expectations. Company was buying at 9x-10x EBITDA during the frothy days, this doesn’t give them much leg room for error. With the debt market being dry, they can’t simply tap the debt market for covenant relief and/or re-financings. It’s not hard to see -> “not perform to expectations” translating into complete write-down to zero. If right now is the BOTTOM, then sure its a great buy (i.e. book value wont decline). But if we’re not (i.e. potentially the beginning), then that dividend is in real big trouble.
nvrmnd
I think what you’re seeing with regard to declining valuation on BX is negative sentiment about the overall deal environment. Big deals aren’t getting done or are falling apart (see the ClearChannel announcement yesterday), and there isn’t a lot of visibility on when things will improve. Portfolio companies appear to be in good shape with only a couple experiencing any distress, but even so, PEG’s don’t want to exit investments in a downward market. Same thing applies for its real estate business. All factors considered, the tough deal environment makes it hard for the company to realize revenues, and even though the advisory business seems to be holding up OK (with the restructuring business emerging as a greater contribute as the economic cycle continues), the bread and butter of the company is deal flow and I think all the large LBO shops are exposed to this and will have to look towards smaller acquisitions or international opportunities.
If that’s really so, then I want an even bigger piece. If SBUX shows declining sales, that’s a bad sign; It might well mean that the world has decided that SBUX has crapy coffee (they do). There is no reason t think sales would rebound. If BX has declining deal volume due to an unfavorable deal environment why should we care? The deal environment will pick back up again some time. If not, our BX investment is the least of our problems. “Company has great long term value, but how long before you see those results? 2 years? 3 years? 5 years?” Geez has equity investing become so short-sighted that we need to realize long-term value in less than 2 yrs? Edit: "I respect Steve Schwarzman so much that if he is selling i’m not buying… he sold BX @ 31. FV must be $8 or so. " I’d sell at 31 too which is not particularly relevant now that we are at half that.
I was looking into FIG the other day for very similar reasons you’re looking at BX…basically my thesis is that the AM/PE/HF industry is going to continue to grow rapidly (over the next 5-10 years), and we’re in a cyclical downturn making these companies very cheap. Counter intuitively, I think that the events of the past year will help the BXs and FIGs of the world long-term, because there will be a “flight to quality” among investors - in other words, less-established hedge funds and pe companies are not going to find funding as easily as the past few years after investors got burned over the past year. Sure, BX and FIG got burned as well, but if you are investing your money you are going to go with the name brand now. This article is what prevented me from investing in FIG: http://www.thestreet.com/_yahoo/funds/investing/10341308.html?cm_ven=YAHOO Sounds like the partners cashed out with the public offering, and there’s no way I’d invest in a company with that kind of management. I think I remember reading something similar about BX but it was awhile back and can’t find anything right now. Does anyone have any idea about BX’s corporate governance? I agree that the dividend yield alone makes this stock look attractive…
JoeyDVivre Wrote: ------------------------------------------------------- > If that’s really so, then I want an even bigger > piece. If SBUX shows declining sales, that’s a > bad sign; It might well mean that the world has > decided that SBUX has crapy coffee (they do). > There is no reason t think sales would rebound. > If BX has declining deal volume due to an > unfavorable deal environment why should we care? > The deal environment will pick back up again some > time. If not, our BX investment is the least of > our problems. Deal flow is one thing, but financing is another, and it’s not all that likely that financing will become as cheap as it was in the last couple of years unless banks are prone to letting history repeat itself. Lenders flat out don’t want to provide that much leverage to finance large deals these days, and as long as sponsors have to make larger equity commitments, their IRR’s will decline and earnings will be less. On the middle-markets side, it seems that banks are more willing to lend because the absolute dollar commitment will be less, but there have definitely been stricter terms and covenants and the cost of loans has increased. Anyway, I think it’s fair to say that valuation on BX is cheaper now than it was last summer, and it’s also easy to say that the deal environment will rebound assuming that everything goes in cycles…but what creates uneasiness among short- and medium-term investors concerning the deal environment is a lack of a timeframe, and I don’t think there’s any banker out there that can tell you with real certainty when things are going to improve. At least none of the bankers we’ve met with lately have told us that, and you’d think they’d be the first ones to tout their optimism about things. And what does valuation really mean when you can’t put a time horizon on when you expect to monetize your investment?
BTW, I’m not trying to say that BX is a bad investment, but simply trying to explain the reasons why more people haven’t bought into it. For what it’s worth, however, I have never owned shares of BX and am not thinking about buying any until there’s more clarity on the M&A and credit markets.
BX is, and always been a shame listing. The whole PE boom for many firms from where I see it was fueled by cheap money which is like financial crack. Just my 2
Heard a presentation from a guy from Evercore yesterday, and while they tried to put a pretty face on it, the deal space for large cap financial buyers is radically different than just one year ago. Because of the lockups and fee structures BX clearly deserves a premium to standard asset managers, they’d have to lower just for me to consider them fairly valued, and even low to be a buy.
Maybe this is just me but … I think PE’s investment returns are likely to trend down in the coming years. The hurdle rate for PE shops are high against the likes of the Hedge fund industry. IRR of 15% is not too shabby for hedge fund, but not so (attractive) for the PE guys. Even during the supposed PE Boom (I never really subscribed to that), PE shops were already thinking of expanding in other countries due to attractive investment opportunities and a competitive domestic side. It’s a dog-eat-dog world with hedge fund in the mix and more money thrown at the PE funds. Moreover, orphan companies, a rich source for the PE guys, are quickly being spun-out into public entities (tax advantages). Even in this crappy equity market, public companies are still planning to spin out these unloved companies. This really leaves the large cap space open for the PE guys to really do their magic. With increased pressure on the Board and Upper Management, this changes the available pool of “under performing companies” that the PE guys can buy. Like Numi said, the market is concerned about the pipeline due to the difficult debt market. For me I would be more concerned about the investment already on the books. Like a regional bank with bad loans, valuation for PE shops can drop rather quickly with bad investments on their books. Ever week, we are hearing about some deal that went bad. And like a regional bank, all it takes is a small fraction of the investments (loans) to go bad before the book value gets cut. This liabilities is in the form of the “clawback provision.” In other words, if one investment goes back, the previously booked incentive fees will reverse it. (The analogy to the regional bank is a bad one… i know). There is more to it than how i just describe it (rather complex, be more than happy to give more color on it). I dont follow BX very closely but I know Freescale quite well and this company is in HUGE trouble. If BX has to impair it then previously booked incentives fees (non-FSL related) will have to be reverse. When that happens, watch out. And Yes, two years is a long time horizon for investment in a financial company. I dont think anyone is smart enough to predict what’s going to happen in the next two years with the financial markets.
I would never own BX. The only people really being rewarded for taking the risks are the principals of the firm, Schwarzmann and Co. The BX shareholders get whatever is left that the principals are willing to part with. Like an owner throwing leftovers to his dog after dinner is eaten. Also, favorable credit environments doesn’t always exist which IMO makes BX appear cyclical.
there was a WSJ article recently on exactly this risk - BX compensation ratios are very high, and there is little protection for shareholders from principals amping up their share before equity gets its return. no compensation committee. good luck trying to make money off these guys.
PEGs are going to be under pressure until the credit situation is solved and faith in the market is restored. BX is no longer able to do 30:1 type of crazy leverage buyout deals anymore. I believe it will take an entire business cycle (average 5 to 7 years) before debt becomes cheaper and more easily available.
rohufish Wrote: ------------------------------------------------------- > there was a WSJ article recently on exactly this > risk - BX compensation ratios are very high, and > there is little protection for shareholders from > principals amping up their share before equity > gets its return. no compensation committee. good > luck trying to make money off these guys. ^ That’s a good point. Hmmm.