Earlier this week, I detailed several storylines related to The Blackstone Group going public. Now that we’ve passed that Rubicon, the story has evolved into a larger question of whether or not the IPO represents a private equity peak. Or, as Rob Cox of BreakingViews suggested earlier today on CNBC, could this be private equity’s “AOL-Time Warner moment?”
My initial reaction was “no,” because the AOL-Time Warner debacle was largely caused by the voluntary merger of two mismatched companies. If the private equity markets are to tank, on the other hand, it won’t be because Blackstone went public (there are plenty of other reasons). The IPO might reflect current private equity hype, but will not make good deals better or bad deals worse. Market intrigue more than market driver.
But there is a second part to AOL-Time Warner’s troubles, which was that the merger was only made possible by the bubble-era value of AOL. This is where I see some similarities.
Blackstone is probably not really worth whatever its market cap is once it goes public. This isn’t to say that the firm is lying or that it’s not good at what it does. In fact, I’m on record as saying that I’d rather have an LP interest in Blackstone than in any other private equity firm.
But the reality is that the value of Blackstone’s underlying portfolio assets – like AOL stock back in 2000 – is inflated. Not so inflated as to foreshadow a crash, but enough to result in future declines. In fact, most mega-fund LPs already have accounted for a mega-market downturn into their multi-year return projections (often at the GP’s behest).
Current mega-fund returns are largely dependent on stable interest rates and continued public market liquidity (who else is going to buy HCA or SunGard?). Unlikely that we’ll see either for too much longer (unless cycles become extinct). LBO firms also require public market trust, which is quickly eroding (see: Clear Channel, etc.). Maybe mega-LBO firms in past decades could have kept producing superior returns in spite of such pending changes, but that was when most deals were “buy to save” instead of “buy to build.” You can’t leverage turnaround potential in an already-thriving company.
So, to sum up: Blackstone’s IPO is not private equity’s “AOL-Time Warner” moment. The moment was probably coming anyway…