the Contrary Investor

August 7, 2007

BX the Dog

Filed under: Blackstone,Short — contraryinvestor @ 2:44 am

BX the dogIn today’s (08/06/2007) broad based rally in the financial sector every major investment bank and broker dealer was up tremendously. Fortress Investment Group, the other large publicly traded PE shop, was even up 6.67%, despite having sunk some 39.1% nearly straight down since its February 2007 IPO. They were all up that is, except BX.

While the average financial player advanced 3.51% BX only advanced a meager .57% despite BUY ratings from every major brokerage on Wall Street and a 281 point rally in the Dow. This behavior belies that there is little investor support for the BX “stock”. I use the term “stock” loosely to describe the BX non-voting units representing the limited partner interests that Schwartzman & Co shilled onto the market.
Yet another contrarian indicator appears on the first page of the BX OM: “We have entered into an agreement with an investment vehicle established by the People’s Republic of China … we will sell to it $3 billion of non-voting common units at a purchase price per common unit equal to 95.5% of the initial public offering price in this offering.”. Is there anyone who’s investment lead should be more avoided than government of COMMUNIST China. The country is literally anathema to making profit. Schwartzman saw these guys coming a mile away and their participation is just one more sell signal.

Taking a closer examination of exactly what one receives for his share in Schwartzman’s magical money machine uncovers the beauty of the Blackstone IPO (as a vehicle for cashing out the senior partners):

1)”The Blackstone Group L.P. is managed by our general partner, which is owned by our senior managing directors. Our common unitholders will have only limited voting rights and will have no right to elect our general partner or its directors.”
Translation: We’re in charge no matter how poorly we perform as managers or whether we decide to take your money and blow it on Beanie Babies

2) “Immediately following this offering, our existing owners will generally have sufficient voting power to determine the outcome of those few matters that may be submitted for a vote of our limited partners, including any attempt to remove our general partner”.
Translation: Don’t even think of trying to get rid of us, we already thought of that.

3) “The partnership agreement of The Blackstone Group L.P. limits the liability of, and reduces or eliminates the duties (including fiduciary duties) owed by, our general partner to our common unitholders and restricts the remedies available to common unitholders for actions that might otherwise constitute breaches of our general partner’s duties.”
Translation: We can and will screw you at our digression, and don’t think about suing over your rights as a Shareholder, you bought “units”… remember, units are not governed by the rules of fiduciary responsibility, “units” are governed by the rules which we have just made up… right now.

4) Potential conflicts of interest may arise among our general partner, its affiliates and us. Our general partner and its affiliates have limited fiduciary duties to us and our common unitholders, which may permit them to favor their own interests to the detriment of us and our common unitholders.
Translation: (See above section on unit holders being screwed)

I could go on but the general idea has become apparent. Blackstone’s unit holders have no rights. The OM does make mention cash disbursements to the unit holder which one must assume will be the only value of these “units”. While it is unclear as to the size of these disbursements at present, clearly BX’s $26.6bn market cap, a value nearly equal to that of Lehman Brothers ($30bn… and their share holders have rights) is far too high. As much as I am tempted to say these units are completely worthless the trade for my portfolio will be the purchase of the March 2008 $17.5 puts. While certainly unscientific, until the amount of the distribution is known, I will use the trajectory of Fortress Investment Group’s fall from $31 a share in February 2007 to $18.87 today as a proxy. A similar slide seems inevitable once BX’s underwriters are no longer vigorously supporting the price.

All of this being said, Blackstone remains an excellent business and a true leader of its field. The firm hires many of wall street’s best and brightest. However, one has ask to ask one’s self “Would Blackstone ever invest in the “units” of a company where it had no input on management decisions, no legal rights and management had not fudiciary obligation to protect Blackstone’s investment?” The answer is a simple, NO.


UPDATE (08/13/2007):

bear-attacks.jpg“Blackstone Group LP, manager of the world’s largest private-equity fund, said second-quarter earnings more than tripled as revenue increased during a record year for leveraged buyouts. Net income was $774 million compared with $224 million a year earlier, New York-based Blackstone said today in its first report as a public company. ”

Wow earnings tripled… One would imagine on news like that a stellar name like Blackstone must have gone through the roof, right? But Blackstone rose only +0.43 (+1.70%) on the day, closing at $25.71. EARNINGS TRIPLED and shares only managed to move up 1.7%.


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