Monday, March 26, 2007

Blackstone cashing in their chips...

I haven't said anything about the impending IPO of Blackstone, since it really isn't a bond story. However, the Wall Street Journal has this piece on how widening credit spreads impacts the economics of private equity deals.

The story broadly hints that Blackstone's partners are trying to get out while the getting is good. Here is my quick take. Private equity is a permanent part of a well functioning capital markets system. The big LBO's get the attention, but private equity is more broadly a source of high risk investment capital for various ventures that are too risky (or otherwise not a good fit) for banks, bond markets, or public equity to take.

That being said, there is a logical limit to how large a private equity firm can be and still deliver the big return numbers which are commensurate with the risk taken. In a period where credit is hard to come by, that size number is even smaller. So Blackstone's partners realize that their fee income is likely, at best, cresting. So why not use the positive sentiment towards the company to go public? As the WSJ article says, the company could use their shares to make diversifying acquisitions. Or else the partners simply get a huge payday.

Personally, I wouldn't touch the shares.

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