Power and Money

Blackstone and LBO Boom: Watch The Credit Market

As I write this, Blackstone shares are up more than 1%, but still below $30 a share and below the offering price. And the grave dancers who have been predicting the LBO boom say: See? We're right! Investors don't want to bet on Steve Schwarzman anymore.

But it's hard to bet against a master dealmaker like Schwarzman--one day after the biggest LBO on record, BCE, is announced.

So let's play devil's advocate here.

From a Blackstone perspective, the IPO was a success. Shares priced at the top of the range, injecting the company with a war chest of cash. Stock weakness becomes an issue if Blackstone wants to use it as currency, for instance, to make an acquisition. A weak stock price isn't going to give a company much to offer when making a deal. But in and of itself, if Blackstone is staying solo, a drop below the offering range is no deathknell. It's fun for all the doom-and-gloom forecasters out there who are trying to predict a top (does anyone ever get it right? I guess if you stick to your prediction long enough, eventually you may be right).

The stock drop (and the threat of higher taxes on publicly traded partnerships and partners, for that matter) isn't scaring off other alternative investment firms from braving the seemingly unkind public waters. Och-Ziff filed its papers.And KKR is still in the wings.

The bigger threat to the LBO boom is what's happening in the credit markets. Issuers pulling offerings, reducing offerings and incurring higher costs to borrow impacts returns. Once IRR's start to dip below what investors can get from other investments, whether it be stocks or bonds or real estate or wine, then, the end is near. When deals take longer to complete, and cost more to complete, that hits returns. Forget BX shares--watch the credit market.

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