Three years on, Blackstone may at last be a bargain

July 3, 2010

Three years on, it may finally be worthwhile for bargain-hunting investors to take a look at Blackstone. On June 21, 2007, Steve Schwarzman and Pete Peterson shook up the private equity world by taking their firm public. They landed a market valuation of some $30 billion, which looked too rich even during those heady days but initially went even higher. Times have changed.

Back then, Blackstone’s shrewd partners knew the top of a cycle when they saw one. They locked in permanent capital provided by lesser mortals, while Peterson cashed out to the tune of nearly $2 billion and Schwarzman pocketed almost $700 million.

Those who hoped to capture some Blackstone magic have been sorely disappointed. The firm’s listed units have tumbled 69 percent since the IPO against a 31 percent decline for the S&P 500 index. Even the shares of much-maligned Goldman Sachs are down only 40 percent during Blackstone’s public life.

Timing may at last be on the side of investors. A simple way to value Blackstone is to separate its two broad categories of income. A portion of the firm’s earnings are relatively predictable, comprising the fees it charges to manage assets and to advise companies on restructuring and deals. After deducting base compensation and operating expenses, Blackstone generated some $420 million of these in the 12 months to March 31. Apply a multiple of 15, the same as respected traditional managers such as Blackrock garner, and they’re worth $6.3 billion.

Second, there are performance-based fees and the firm’s slice of profit from the funds it manages and invests in. After expenses, these came to about $747 million in the year to March. Blackstone has cleaned up some of its peak-of-the-market investments, such as Hilton Hotels, and may be poised to sell others like Nielsen. But this valuation-dependent income stream is much lumpier. Put it on a lower multiple of nine, and it’s worth about $6.7 billion.

Add it all up and Blackstone units appear to be worth just under $12 apiece. That’s about 20 percent above where they’re trading. It’s true that Blackstone’s performance is partly at the mercy of financial markets and the economy, where the outlook remains highly uncertain. But as a blue-chip in its business the firm also benefits from any flight to quality. It may at last look undervalued as a stock — even if it’s still only one for the brave.


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Gentlemen we are in business for profit.

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KKR is trying to achieve a high valuation with their intended listing…

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