Thursday, April 10, 2008

Private equity and experience

Guambat recalls roughly an old saw that goes something like, "when a man with experience meets a man with money, the man with experience ends up with the money and the man with the money ends up with an experience."

Steven Schwartzman is and was the head of Blackstone, at one time a big private equity house with loads of experience making bootles of money, mainly taking public companies private and looting them of their savings, although this characterisation is likely "unremittingly hostile and frankly devoid of factual support".

Now, showing just how experienced a man he is, he has turned around that private equity "business model" and taken money away from other suckers, the "public".

He did that by selling his private equity Blackstone partnership to the public in an IPO ("initial public offering"). Along with others, he saw (first hand and from a front row seat) that the credit markets were getting more than a bit frothy and shaking all other markets, thanks to the likes of himself, but he went one further and acted on his experience to "reposition" himself and his insiders.

Guambat has had several occasions to mention the Blackstone and its private equity cronies in posts past, and this is a sort of reminiscence of those posts, boosted along by a bit of rearviewing by Roger Ehrenberg in his Information Arbitrage blog:
Considering Blackstone, One Year Later

Amidst the detritus of today's broken markets, I felt compelled to look back and review some of my thoughts around the Blackstone IPO. Why? Because I had thought their filing had pretty much signaled a frothy equity market, and certainly a top for the private equity business, due both to the "perfect" environment for raising debt capital (e.g., savvy, opportunistic issuers coupled with liquidity-rich, brain-dead investors) and that some of the smartest money in the business wanted to take chips off the table and raise permanent capital. And were willing to take this step even in the face of much criticism and consternation from their LPs and others. Cries of hypocrisy came from every direction. But still Mr. Schwartzman pressed on.


Let's take a quick look at the data:

GSPC S&P 500 Index

3/17/2007 (date of my first post):1386.95

6/22/2007 (date of BX IPO): 1502.56
(+8.3% from 3/17 post)

3/28/2008 (last close): 1315.22
(-5.2% from post, -12.5% since BX IPO)


IPO price: $31.00

6/22/2007 close: $35.06 (+13.1% from IPO price)

3/28/2008 close: $15.28 (-56.4% from first day close)

I think we can all look back at the Blackstone IPO as one of the definitive signs of the troubles yet to come. Mr. Schwartzman and his PE colleagues all saw the same thing, the possibility of a sea change in the debt and equity markets, but only he had the guts and the intestinal fortitude to get a deal done - fast. And his decisiveness certainly paid off in spades - for Blackstone insiders, that is. In the future we should be more aware of the signs the top tier of "Money People" are sending us. Because it was all right there for us to consider. But few people wanted to believe the end was near. Sadly, this is a fixture of the human condition, particularly as it relates to investing.

Guambat's take is that, when looking for guidance, don't become enamored with what all the folks with all the money are talking about and follow their crowd; pay attention to what the guys with the experience are doing, but not talking about.


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