EW YORK (AP) – Shares of Blackstone Group sank below the price of last week's much-hyped initial public offering on Tuesday, as the bailout of a Wall Street hedge fund raised the specter of higher borrowing costs for the company.
Blackstone, a private equity firm, priced its IPO at $31 last week. The stock spiked to $35.06 at its debut Friday, but fell 7.5 percent Monday and slipped an additional $1.44, or 4.4 percent, to $31 in morning trading Tuesday. The shares traded as inexpensively as $30.36.
Volume was heavy, with 21.1 million shares changing hands before midday. About 35 million shares traded the entire day Monday.
Cowen & Co. trading analyst Mike Malone said the well-publicized troubles at two hedge funds operated by Bear Stearns Cos. are forcing investors to evaluate how easily Blackstone Group can raise money.
“It's been a perfect environment for Blackstone over the course of the past several years,” Malone said. “Interest rates have been low and valuations on equities have been relatively cheap. If interest rates were to rise, that dynamic would change.”
Earlier this month, Merrill Lynch & Co. seized $850 million in collateral from a hedge fund called the Bear Stearns High-Grade Structured Credit Fund. The fund had lost more than 20 percent in the first four months of 2007, and Merrill Lynch, which lent money to the fund, worried it would be unable to repay the debt.
While Bear Stearns lent the fund $3.2 billion to assure other creditors their investments were safe, Malone said the bailout means some lenders may demand fatter interest rates for risky loans like debt used to leverage buyouts of public companies.
Under the private equity model, firms like Blackstone Group buy public companies, saddle them with debt and later sell them at a profit. Higher interest rates eat into the return on these types of investments and make it more difficult to raise money.
If lenders with shrunken risk appetites demand higher interest rates for private equity financing, Blackstone Group would have to pay to lenders more of the investment profit the firm currently pockets.