If Blackstone Is Selling, Why Are You Buying?: Matthew Lynn
By Matthew Lynn
March 21 (Bloomberg) -- One by one, the big companies of the alternative investment industry are selling.
Blackstone Group LP, the leveraged buyout firm that has spent $160 billion taking companies private in the past two decades, has just announced its initial public offering. Fortress Investment Group LLC, which manages hedge and private- equity funds, listed its shares in February and the stock almost doubled on the first day it was traded.
In Europe, booming hedge funds are queuing up to go public. Polar Capital Holdings Plc did so last month, and Marshall Wace LLP raised 1.5 billion euros ($2 billion) through an IPO for one of its hedge funds late last year.
Yet if Blackstone, Fortress and other alternative- investment managers are selling their shares, should you be buying?
Probably not.
The managers of those firms are better at calling the top of the market than most of us. The rush of share sales suggests the boom in alternative investments may be ending.
It would be better to sit out the IPOs, wait for the share prices to drop, and then buy them.
``There is a fin-de-siecle feel to many of the IPOs,'' Tim Price, investment strategist at Union Bancaire Privee in London, said in a telephone interview. ``These worlds are mashing into each other at extreme speed. Alternative investments are not really alternative anymore.''
Out of Steam
Nobody would argue that alternative investments have been the favorite sector of the financial markets for almost 10 years. Money has poured into private-equity and hedge funds as investors sought to diversify away from traditional stocks and bonds, and to boost returns with sophisticated financial engineering.
Now, there are good reasons for thinking the boom is running out of steam.
First, investors are starting to rebel against the high fees and profits generated for the managers of alternative investments -- at the expense of investors.
In hedge funds, Russell Read, chief investment officer of the $225 billion California Public Employees Retirement System, recently attacked the excessive fees charged by many managers, often for quite ordinary performance. No doubt, he struck a chord with many investors. Nobody minds paying big charges for big gains. They aren't so keen when they just get something that looks like an index-tracking fund.
Regulation Calls
Likewise, private-equity funds exist to buy out public companies from institutional investors -- and then sell the same business back to the same people a few years later for a lot more money. It can't be long before those investors start wondering why they are giving away so much.
Next, the growing size of the alternative-investment industry will inevitably generate calls for more regulation. The private-equity industry is feeling the heat, both in the U.S. and in Europe. The U.S. Justice Department is already investigating whether private-equity firms are colluding to set prices for companies, while U.K. trade unions have been campaigning to change the tax rules on buyout funds.
That matters. One of the reasons private equity has been so successful is because it has been beyond public scrutiny. It has quietly overhauled businesses without anyone monitoring the day-to-day decisions. The chances are that private-equity firms won't get away with that in the future.
Lastly, alternative investments aren't really alternative anymore. Once Blackstone has listed its shares, it is hard to see what will be so private about the private-equity firm. Its investments would be subject to the same scrutiny as any other listed company -- and certainly its own performance will be.
No Longer Alternative
In effect, Blackstone will turn itself into an old-style company with interests in various industries. There's nothing wrong with that, so long as it is well managed, but there is nothing alternative about it.
Likewise, many hedge funds have become indistinguishable from standard mutual funds. That may be good or bad, depending on how smart the managers are at calling the market, but it doesn't make them an alternative to dozens of other investment vehicles.
The alternative investment industry isn't about to vanish. Yet it may be entering a period of restrained growth. In that case, many of the IPOs will soon look overpriced.
Indeed, that already seems to be the case. Fortress's shares dropped from $31 in February to $24 this month. Polar shares declined from 261 pence to 231 pence over a few weeks.
The right strategy? Let the alternative investment firms stage their IPOs, then you can wait for the shares to drop once investors realize this is an industry with its days of turbo- charged growth behind it.
Pick up the shares when they are more reasonably priced. That's what the hedge-fund and private-equity managers would do.
(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Matthew Lynn in London at matthewlynn@bloomberg.net .
Last Updated: March 20, 2007 20:13 EDT |
