Analysts: Clearing Up Myths About Blackstone [NYT]
December 2, 2009, 3:49 pm
dealbook.blogs.nytimes.com
Units in the Blackstone Group aren’t exactly doing poorly right now — but they’re not at their 2007 initial public offering levels either.
That was enough to prompt Credit Suisse analysts, led by Howard Chen, to publish a research report on Wednesday about 10 misconceptions they’ve heard about the private equity giant’s business model. The points run counter to what Mr. Chen sees: that the best time to invest in Blackstone is now, while the firm can buy companies cheaply.
Some of the problems Mr. Chen describes are misunderstandings of how private equity firms work. Those include:
* Concern that Blackstone’s fees come from its total assets under management (meaning they’d be subject to the vicissitudes of write-downs and write-ups), rather than fee-earning assets under management (i.e., the capital it has committed to various investments).
* Concern that when a portfolio company founders, Blackstone itself is put at risk financially. As Mr. Chen points out, the damage is limited to the particular fund that investment was made from, and the firm itself is not impacted.
* Concern that Blackstone doesn’t pay taxes. Depending on whether it’s a management fee or carried interest, the firm pays the corporate tax rate or almost nothing, and distributions to unitholders depend on the ratio of the two within those payments.
Some are misunderstandings about Blackstone’s business model, including concern that it’s all private equity. (The firm is split among buyout, real estate, hedge fund and financial advisory divisions.)
And some are slightly more subjective concerns, including whether the firm can conduct its core deal-making business with less leverage available; whether it can still earn money by making smaller-sized buyouts; or whether it is having trouble raising capital for new funds.
Mr. Chen believes those aren’t problematic issues. Indeed, he has a target price of $18 for the firm’s stock (which was trading Friday afternoon at about $13.52, up over 102 percent for the year to date).
“We have begun to see early signs of a rebound in activity for the private equity industry,” Mr. Chen and his team write. “Our outperform rating and target price reflect our constructive view on longer-term franchise positioning coming out of the cycle (strong brand and track record, ample capital to deploy, leverage to M&A/restructuring activity).” |
