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Blackstone: House of Cards


This is a house of cards the likes of which we have rarely seen.

I am already working with brokers to obtain shares of Blackstone on its IPO. I assume investors will be climbing all over each other to get a piece of this.

But I am not working with brokers to buy the shares like everyone else on the IPO; I am working with them to borrow the shares so I can short the shares after the IPO.

This is a house of cards the likes of which we have rarely seen.

As an aside, I find it interesting that regulators forbid certain "unsophisticated investors" to invest in the funds Blackstone runs (you must be a "qualified investor" with a certain net worth and income), yet they are willing to let Grandma Jones take her social security money and buy the shares of the company. I am not saying Grandma Jones shouldn't be allowed; I am just pointing out an interesting dichotomy.

I also find it ironic that Blackstone rationalizes privatization by pointing out how cumbersome it is to be a public company, yet they want to become a public company.

First let's look at the uses of the proceeds of the IPO. Since Blackstone is a partnership, all that new money essentially goes to the partners. The papers say the proceeds will go to buy other asset management companies (diversify the partners' risk), pay down debt (the personal debt of the partners) and reward the founding partners (the partners are exchanging their equity for cash for past performance). New shareholders are rewarding the partners for their past performance of which those new shareholders did not participate. The logic escapes me.

This is the key to why it makes no sense to buy the shares in Blackstone: what made the company successful in the past, carefully betting its own money in finding real value, is very different from the way it approaches deals currently. Crucially different.

The fund must put its investors' money to work to generate fees. Even though the managers have a fiduciary responsibility to their investors, there is great pressure to do deals and assume risks they should not in order to generate those fees. This is an inherent conflict of interest. From what I have seen so far, they have not been resisting those temptations.

If the company continues to invest the money loosely, at some point those increased risks (heavily levering companies in order to get ROA high enough) will blow up. If enough deals blow up, investors will pull their money and the shares of the public company will be worth zero.

This is not a biotech company. Investors in biotech take huge risks for huge returns. This is understandable. Investors in Blackstone will be taking huge risks for moderate at best potential returns. Growth in fees, which is all shareholders are buying this for, is likely to be small since they are already having trouble finding value.

There are clear reasons why these "smart financiers" are selling. Do you have clear reasons for buying?

Best Regards,
Mr. Practical
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No positions in stocks mentioned.
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