Blackstone’s debut may not look like another Netscape moment for the private equity (PE) industry. After all, shares of Steve Schwarzman’s buyout shop popped just 13% on their debut. The Internet browser that kicked off the dotcom boom in 1995 doubled. Even Fortress, a smaller rival to Blackstone, saw a 68% surge on its premiere.
But like the Netscape IPO, Blackstone’s $7.1 billion (Rs29,110 crore) share sale—including a chunk sold to China—is the clearest sign yet that investors have suspended their disbelief when judging the PE boom. The $39 billion value they have put on Blackstone ignores significant headwinds the firm, and the industry as a whole, face. Kohlberg Kravis Roberts & Co.’s willingness to follow Blackstone into the public markets suggests investors will be willing to look at the glass half full for some time to come.
Sure, there are differences between a Netscape and a Blackstone. The former was a novelty at the time—the first large Internet company to go public. Shares were hard to value. The firm had no profit and only $17 million in revenues. But not unlike the arguments in favour of buying Blackstone, investors were promised an irresistible growth story. And Netscape’s hugely successful IPO opened the flood gates for other dotcom listings. Investors sorely regretted most of those purchases.
Investors are valuing Blackstone at more than 30 times historic pro-forma earnings because they believe they are not only sustainable, but beatable. They have not factored in threats to the industry’s exploitation of tax loopholes, which may be worth 20% of profits; the fact that compensation costs at Blackstone will rise over time. On Friday, Democratic Congressmen introduced a Bill that would tax carried interest at the income-tax rate rather than capital gains tax rate.
Nor have investors seemed to factor in macro-economics, such as the effect rising credit spreads will have on leveraged buyouts. Investors in Netscape did the same thing. It worked for a while. And then it didn’t.