With Blackstone,
Worries Old and New
By KAREN RICHARDSON
December 5, 2007
Pity the poor Blackstone shareholder.
Investors who bought shares of Blackstone Group LP from its initial public offering in June and held on to them have seen the stock price fall more than 30%. Old worries such as little disclosure about its investments; limited rights for its shareholders compared with its fund investors, or limited partners; and tax risk have weighed on Blackstone. And that has been compounded by the recent deal-chilling credit crunch.
Now, a relatively small investment Blackstone made four years ago -- in Financial Guaranty Insurance Corp. -- needs some maintenance, with FGIC likely to require a capital infusion from Blackstone and FGIC's other investors to save its business. The problems facing FGIC only add to the woes weighing on Blackstone's share price.
In 4 p.m. composite trading on the New York Stock Exchange yesterday, Blackstone stock fell 26 cents, or 1.2%, to $21.34; the IPO price was $31. Its market value is about $5.5 billion, just a fraction of the more than $90 billion in assets the firm manages in private-equity and real-estate funds, hedge funds and mutual funds.
"It's a good storm they've been in," says David Ellison, who manages financial stocks for FBR Funds, which has $2.3 billion under management. Like many investors, he bought shares in the IPO but has since sold them.
Like other bond insurers that guarantee interest and payment in the event of default, FGIC is under scrutiny by credit-ratings firms over whether it has enough capital to cover potential losses in its portfolio of complex debt securities backed by subprime mortgages. As default rates have been rising in these riskier mortgages, both Moody's Investors Service and Fitch Ratings have said FGIC is at higher risk than most of its peers of falling short of their capital guidelines required to keep its coveted triple-A credit rating.
FGIC didn't return calls seeking comment.
Blackstone, together with private-equity firm Cypress Group and mortgage insurer PMI Group Inc. bought stakes in FGIC in 2003, when its former parent, General Electric Co., put it up for sale. The consortium paid $1.86 billion, which gave Blackstone and Cypress each a 23% stake and PMI a 42% holding.
These investors are working on a solution to help FGIC with some combination of cash, debt and reinsurance but haven't worked out all the details, according to two people familiar with the matter.
In any case, Blackstone would pay its portion of the bailout -- which could be more than $200 million, according to some estimates -- from the fund that made the original investment in FGIC, according to one of these people. That fund was raised from limited partners and has nothing to do with the permanent capital Blackstone raised from shareholders in its IPO.
Blackstone has been unequivocal about its intention to make investment decisions based on what is best for its limited partners as opposed to its shareholders, even if those decisions raise eyebrows.
"The average holding period of our investments is 5½ years," says Peter Rose, a Blackstone spokesman. "We are prepared to be long-term investors through business cycles."
Any more money that Blackstone sinks into FGIC isn't likely to have much of an impact on its earnings, which analysts are already projecting will shrink in 2008 because of the poor environment for the megasize deals at which Blackstone excels.
The firm continues to attract assets that generate management fees, which comprised 41% of revenue through the end of the third quarter.
But the slumping real-estate market hurts its prospects for growth in performance fees. And, with the volatility in the stock and debt markets, Blackstone's exit opportunities, by way of selling portfolio companies to strategic buyers or listing them through public offerings, have diminished.
For these reasons, Douglas Sipkin, an analyst at Wachovia Capital Markets, lowered his estimate for Blackstone's 2007 "economic net income" -- net income excluding the impact of income taxes, noncash charges related to vesting of equity-based compensation and amortization of intangible assets -- to $1.65 a share from $1.86 a share. For 2008, he reduced it to $1.47 a share from $1.61.
In addition, the continuing political debate over whether to tax the fee income of firms like Blackstone at a higher rate, and the poor credit environment, are likely to hang over the stock for much of 2008 and beyond, investors say. On top of that, the difficulty in valuing private investments and projecting the fees that come from them continue to stump investors.
"Valuation of the security is very complex for this company, and this issue has been a concern for us since the IPO," says Tim Ghriskey, chief investment officer of Solaris Asset Management, which manages more than $1.5 billion in assets. Mr. Ghriskey says he avoided buying Blackstone during its IPO because he thought it was expensive.
Now, Mr. Ghriskey, Mr. Ellison and other investors are starting to take another look at Blackstone shares, especially since they have fallen so far in price. Blackstone is trading lower than analysts' lowest price target of $23. Investors also are heartened by Blackstone's strong focus on high-growth Asian markets, as well as opportunities at home in restructuring and distressed markets.
"We certainly see value," Mr. Ghriskey says. "Down here it certainly does seem like [the stock] is discounting all potential bad news."
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发表于 2007-12-5 12:36:17
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