'Private equity' now open to the public
Blackstone Group's offering would let average investors take part in trend of buying out public firms.
from the March 26, 2007 edition
Page 3 of 3
"These are the investors that make the market efficient," says Peter Zaleski, an economist at Villanova University in Pennsylvania. "Private equity has been a vehicle for patient management," in an era when public companies feel pressure to focus heavily on each quarter's earnings number.
Private equity refers to a broad class of corporate ownership outside of public markets, which includes start-up venture capital as well as the buyout of more mature companies. These deals can employ debt, or "leverage," to pay for part of the acquisition.
In the 1980s, such leveraged buyouts were often hostile, unwanted by the management of the target firm. Lately – thanks in part to the burden of regulations such as Sarbanes-Oxley accounting rules – public-company chiefs have often welcomed the buyouts and teamed up with them. Typically the company is managed privately for three to five years, then sold back onto the public markets.
One recent study found that, more often than not, these firms outperform their peers in the years following their return to the public markets. The research, written by Harvard University's Josh Lerner, with Jerry Cao, covered 496 such deals that happened between 1980 and 2002.
Those who craft the deals make enormous fees. Will shareholders of Blackstone as well?
The company is following a path treaded by Wall Street's investment banks. Goldman Sachs, for example, has retained the culture of a partnership while also becoming publicly traded.
"The returns wind up being shared with shareholders," says Clifford Smith, a finance professor at the University of Rochester's Simon School in upstate New York. "I've got no reason to believe that Blackstone's not going to solve exactly the same problem" as Goldman Sachs.
But some analysts say it could be a risky time to be buying into this cyclical industry.
The rush of money into private equity, from pension funds and other deep pockets, has pushed up the price of target firms, for one thing.
"It's definitely a seller's market," says Joe McCafferty, an editor at CFO Magazine, which surveys chief financial officers at corporations. Buyout firms are "all in capital raising mode."
Blackstone's motive could be more than raising additional capital through its offering of stock. Some analysts say the move could also help the company pave the way for a harmonious succession as founder Stephen Schwarzman prepares to retire a few years down the road.
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