Anyone familiar with the classic Tom Wolfe novel, The Bonfire of the Vanities, would have a sense of déjà vu working in US financial markets at the moment.
The past week, for instance, saw a monumental day in the inexorable rise of the private-equity juggernaut with the Blackstone Group going public.
Unfortunately, however, it appears that Blackstone and their bankers did the unthinkable — they mispriced the stock. After an initial first-day gain of 13% last week, the stock has been tumbling and overnight closed below the offer price of $31. There will be a lot of worried bankers getting into their limos on Park Avenue this evening.
An IPO of one of the world’s biggest private-equity funds with a high-profile CEO was always going to attract attention.
However, given that even some Republicans in Washington are beginning to view the private-equity industry as a kind of pinstripe variation of the 50 cent “Get rich or die tryin” crowd, the Blackstone IPO has arguably been great for Blackstone executives but bad for the industry.
It has the aroma of the smartest money cashing out at the top. No one sells on Wall Street unless they either have no option or believe their investment is overvalued.
American financial commentators and writers love looking for those seminal events that signal changes or shifts. The Blackstone IPO is now being seen in that context with the influential Barrons carrying an article on the weekend with the self-explanatory title Top of the market.
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As legislators in Washington determine whether they will lift the tax rate on private-equity firms’ performance fees from a 15% capital gains tax rate to the corporate tax rate of 35%, there is a need for some sober assessment of the sustainability of the private-equity boom.
Too many starry-eyed members of the Australian financial community, whose closest dealings with Wall Street have been at their local Blockbuster video store, have clearly consumed the private-equity Kool-Aid.
With the Australian market on its way to another year of record returns and private equity players being forced to pay higher multiples for companies in a rising global interest-rate environment, deals being done now are simply riskier than and not as attractive as deals done a year ago or two years ago. Anything else you hear or read is simply spin.