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Don’t Blame Schwarzman

Blackstone Group hasn’t been faring too well in the public aftermarket, and a story in Saturday’s New York Post led with the following:

Investors in The Blackstone Group are feeling swindled by boss Stephen Schwarzman and are hoping the “King of Wall Street” does something soon to boost the buyout giant’s beaten-down stock.

Let’s break this lead down into its two parts: (A) The swindle and (B) the requested restitution.

(A) There was no swindle. Blackstone offered a long-term growth play that some institutions misread as an immediate bonanza. Don’t blame Schwarzman because you bought something on hype instead of on fundamentals, or because you still don’t understand the difference between shares in a listed private equity firm and LP interests in a private equity fund.

It would be like buying season tickets to the Celtics because you like the Ray Allen trade, and then complaining when they lose games because Doc Rivers can’t run a rotation. Had you done your research, you would have known that Doc’s coaching deficiencies will always be greater than his on-court talent. You swindled yourself.

(B) This is related to A, but more important: Anything Schwarzman could do to boost the short-term stock price would be a further reflection of public market ignorance. For example, Blackstone experienced a brief stock price surge after word spread that it had agreed to buy Hilton. But Blackstone itself hadn’t actually become more valuable. Instead, it had simply agreed to pay more for a public company than the public markets were currently willing to pay for it.

Someone forgot to remind public buyers of the J-curve. Smart investors wouldn’t have bought Blackstone — they would have bought Hilton two weeks earlier.

Moreover, any short-term moves to boost stock price could be a betrayal of Blackstone’s limited partners – who are in this for the long haul. Premature exits or artificially-overpriced purchases might boost the stock price today, but will reduce IRR in the long run. Thus the conflict of interest between public shareholders and LPs – although the latter should win out because their continued support is more important to Blackstone’s future successes.

I doubt too many LPs care that Blackstone’s stock was down at $26 per share as of this writing. After all, they did their due diligence