Saturday, July 14, 2007

Blackstone - Will it Be A Wise Investment?

Private Equity (PE) has been the hottest topic in global financial industry recently. At its center is the IPO of Blackstone Group (NYSE symbol : BX) at the end of June, 2007. It is rather strange that both Forbes and New York Times have issued analysis with negative comments on this PE group after its IPO. Is Blackstone really a poor investment option for investors??? Personally, I don't think so!

The first point which draws my attention to Blackstone is that it has attracted the not yet established China State Investment Company to launch its first ever investment by purchasing its shares with an amount of US$3 billion. With an over-subscription of its IPO shares, it seems that everyone is expecting a great share price performance of the group when listed. However, after its IPO, its share price is really disappointing which are majorly due to the negative comments from the media just after its IPO. But why is the media post such comments just after the IPO which to all will know it will hurt the share price of Blackstone? I may think of some possiblities :

1. The investment of China State Investment may has positive impacts on Blackstone but also have negatives from the political side. Right now the major investment of Chinese foreign reserve is US Government Bond. If it diversifies its investments, who and what will be harmed most? Its successful intial investment may lead to a more diversified profile in this foreign reserve investment. This may also be one of the major reasons why the tax issues have been raised during its IPO which surely have negative impacts on its stock price performance.

2. If Blackstone is a good investment, it will be a good target for institutional investors as well as other central banks. They are more willing to buy its shares at a cheaper price. It is rather strange that media issue such negatives just after the IPO and why not before its IPO as their disclosed information has already been available when Blackstone published its prospectus. Don't they know that such publications will have negative impact on its share prices?

3. Nowadays major investment banks are all getting a close eye on the asset management work from Chinese government. These banks may not want a good performance of Blackstone share price which means a successful investment of China State Investment Company and putting a closer relationship between Blackstone and the Chinese. Such relationship will have an influence in their chances of getting asset management works from China State Investment Company.

All the above are just some thoughts from myself as alternative explanations for the poor performance of Blackstone share price. They may be right and also may be wrong.

However, I still believe Blackstone (BX) is a good investment opportunity for investors. My reasons are as follows :

1. The major incomes of PE company are from asset management and buy-outs. Blackstone will be benefited from its strategic partner, Chinese State Investment Company in both ways :

a) A stake of shares from Chinese Government have paved the way for Blackstone to get asset management works for the Chinese State Investment Company. To a PE company, more assets under management means more profit in the coming future. Chinese government is more willing to make Blackstone more profitable due to the issue of "face". This is also why the Hong Kong Stock market flying high during its 10th anniversary of establishment of HKSAR. The recent decline of Blackstone's share price has led to fierce discussions on the investment strategy of China State Investment Company. Therefore, decision makers of the State Investment company need to find ways to drive up the share price in order to reduce internal pressure. This in turn puts pressure on the Blackstone side. Blackstone will also work harder to raise up its share prices as they also don't want to harm the relationships with the Chinese.

b) Greater chance to do business in China which is one of the fastest growing economy in the world. One of the examples is the closing in of Blackstone on its first direct investment in China, a $400 million stake in state-owned chemical company China National BlueStar Group. There will be less obstacles to get into the major business in China and the take over of state owned enterprise.

2. The tax increase issue may only turn into effect on 2012 which is 5 years away. However, this may not be an issue that really matters as nowadays, it doesn't matter much on locations for financial business. There are a lot of locations with enough supports to become headquarter for a PE company and these cities also welcome huge PE group like Blackstone to come. Additional tax burden may force PE to move out of New York which will in turn hurt the finanicial industry of USA. Many financial institutes have already commented that the strict, rigid and complicated regulations in USA is the major reason for its loss of market share to London. Therefore, politicians may need to think twice before they bring critics into actions.

3. Financial service industry relies hugely on great talents. From the great track record of Blackstone, it shows that the company has been great in getting talents to achieve great results and its business model has been proved to be a great and successful one.

From the above, I truly believe that Blackstone is a good company to invest.

PS. I have turned my thoughts into actions and have bought stocks of Blackstone Group.

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