Saturday, September 8, 2007

The Wisdom of Crowds?

"It's like, how much more black could this be? and the answer is none. None more black."

— Nigel Tufnel, This Is Spinal Tap

Steve Schwarzman must be seriously pissed.

In addition to having Joseph Flom of Skadden Arps put a serious crimp in his social life by preventing him from waggling his private parts in public both during and after the Blackstone IPO, Little Stevie now faces the ignominy of a continuously tanking BX stock price. The naughty little security even had the temerity to close yesterday almost $10 per share (or nearly 31%) down from the June 21st IPO price of $31.

Blackstone's shares are not alone, of course, in having had a serious attack of the vapors ever since Wall Street remembered that Risk is not only a Parker Brothers board game. Listed hedge fund Fortress Investment has crapped out over 50% from its February high (although only a dollar from its IPO price), and legions of investment bankers at Goldman Sachs, Lehman Brothers, and Bear Stearns have seen massive markdowns in the value of all that lovely unvested stock their bosses have rammed down their throats over the last few years. Apparently, things have gotten so bad in the 10021 zip code that there are rumors the Park Avenue matrons are staging a Lysistrata-style sex strike until their husbands manage to restore their companies' stock prices to pre-June levels. (We'll see if anyone notices.)

Now, I don't care how many other billions you have, or how much water you draw in New York society, losing almost two and a half billion dollars on paper in less than three months has got to hurt. And if it doesn't hurt Steve, you can bet your Versace chastity belt that it hurts the lesser demigods at 345 Park Avenue, and plenty.

Normally, private equity professionals couldn't give what is colloquially known as a rat's ass about the post-IPO performance of the stock of portfolio companies they bring to market, except to the extent they want to sell their remaining shares as soon as possible at as high a price as possible. Unlike the typical public company CEO, PE guys are almost completely uninvested, emotionally and intellectually, in their companies' stock prices. In fact, many of them take an almost perverse pleasure in top-ticking the market when they take a portfolio company public. They feel that if the stock does not decline after the IPO, or appreciates too quickly, both they and their bankers have done a lousy job in extracting the maximum juice from the benighted public shareholder. This makes complete sense, of course, since a large part of private equity's business model depends heavily on the public markets selling companies too low and buying them back too high, compared to their intrinsic value.

But in the case of Blackstone itself, the inside shareholders are subject to a completely different—and, for most of them, a completely unfamiliar—dynamic. They are shareholders, and large, locked-up, unvested shareholders at that, completely at the mercy of the Great Unwashed Investing Public they have been used to making such liberal fun of in their investment committee meetings over the past several years. If they buy the Private Equity Council party line—which virtually all of them do—they believe wholeheartedly that private equity is an investment method which produces long-term value appreciation, almost regardless of fluctuations in the public equity and fixed income markets. But now they can see a real-time, tick-by-tick appraisal of the value of their own business by Mr. Market every trading day, which translates into a real-time update on each Blackstone professional's personal net worth. (And don't think that these professionals' wives and husbands don't do the very same calculation every time they plan a shopping trip to Henri Bendels.)

This must be a serious problem, especially for the poor slobs just starting out at BX. Sure, Senior Managing Directors can shrug off the loss of a few tens of millions or so each week, because they already have enough to buy a small principality somewhere, and the Missus has plenty of the folding to keep up appearances at the Central Park Hat Lunch. But an Associate or a Vice President, whose financial status as a PE plutocrat is largely on the come, has no such luxury. It's pretty hard to explain to your significant other why this weekend you can only afford a two bedroom summer share in Hampton Bays when last week you were looking at five bedroom exclusives in East Hampton. It tends to put a bit of a damper on the old love life.

Finally, it has to be galling for these Masters of the Universe—who without exception are hardwired to believe that their judgments of company value are always and everywhere superior to those of John Q. Public—to be handed a report card each and every day by the same JQP which rates their efforts at "B – ; Needs improvement."

Whether this sorry situation will have a long-term negative effect on the performance of Blackstone or not—for example, by distracting the attention and distorting the judgment of its investment managers or by making it harder to attract and retain the best PE professionals—is too early to say. All I would observe is that, in my experience, that little flashing stock ticker in the corner of an executive's computer desktop can be a mighty distraction, expecially if it is flashing red all the time.

© 2007 The Epicurean Dealmaker. All rights reserved.