Blackstone Is Never A Buy

This morning’s big news is that The Blackstone Group (BX) reported a $170 million net loss for Q4, which has helped shove its stock price down below $14 per share in early trading. The question to ask, therefore, is whether Blackstone’s public securities are finally approaching their bottom.

“But Dan, you’re not an equity analyst,” says the fictional reader. “How would you know?”

I wouldn’t, dear reader. But what I do know is this: The public market still doesn’t understand Blackstone, which is why buying its stock at any price is a very risky proposition. High or low.

For starters, there is really no comparable. Sure there are other financial services firms and investment houses, but none centered around private equity to the same extent that Blackstone is. Second, Blackstone’s value does not – or at least should not – directly correlate to the mark-to-market value of its portfolio.

First, there are lots of questions surrounding the validity of mark-to-market for private equity in general (FASB opinion notwithstanding). Second, PE firms are often willing to take initial hits at a portfolio company in order to grow it for the long term (a big advantage of being PE-owned). Third, private equity firms typically have the luxury of waiting to sell until the time is right. The only caveats to that last part are: (A) When a troubled firm needs liquidity events in order to raise a new fund, or (B) If the firm has publicly-traded securities and is feeling shareholder pressure – something which we haven’t seen yet, but which still may befall Blackstone.
Last week I conversed with a public portfolio manager who was thinking about buying some Blackstone shares. What he didn’t understand, he admitted, was the fund management fee stream and how it fluctuates based on capital call-downs. It wasn’t the first time I’d heard similar confusion from people in positions to influence stock prices. For example, I recall being told how Blackstone was a buy last July, because it had just agreed to acquire Hilton. Maybe Hilton will or won’t be a good deal – but the presence of an agreement was certainly not much reason to buy or sell the stock. Need further proof? Listen to the analyst inanity sure to come during this morning’s earnings call.

So to reiterate: My advice is not to buy. Ever. Even if you understand what’s going on, you’ll be at the mercy of those who don’t.