The Blackstone IPO : Part 3 of 3- Private Equity Going Forward

In my prior two posts, here, and here, I discussed how the expected Blackstone IPO raised issues of motivation and valuation for private equity firms, as well as how the IPO affects the rationale for the existence of private equity firms in the first place.

In this post, I'd like to consider how Blackstone and its still-private competitors may now operate.

Regarding Blackstone, what will now become of its unrelated parts? In a world where the firm frequently was seen as a sort of intensive care ward of the corporate world, hidden from view, how does its imminent new role as a public company affect this portfolio? Can Blackstone still confidently bid on turnaround candidates, or "misunderstood" companies, and patiently hold them among other, unrelated companies and active financial service divisions, such as asset management and M&A advisory? If its former cloak of privacy gave it the wherewithal to do so, is that now no longer possible?

Doesn't Blackstone become just another public corporation bidding on assets of other companies?

If so, does this leave other private equity shops with less competition? But with all the existing private shops, and the liquidity among them, could they perhaps put an end to Blackstone's successful bidding for new assets? Doesn't the still-private nature of the sector's remaining titans, such as KKR and TPG, mean that they can reliably and consistently outbid the public Blackstone for assets, just like Blackstone did in the past?

If a handful of other large, private equity shops, such as, e.g., KKR, TPG, and/or SilverLake Partners, all decided to exit the private equity sector, would that mark the end of the era of such firms and activities? Could it be that they all will aim to cash in their "magic dust" premiums, apparently ascribed to the larger, more successful private equity firms? After all, what is so different, or special, about Blackstone's portfolio of assets and operating units, that makes it unique among private equity firms to contemplate throwing in the towel on their business model?

Could we be seeing a situation in which greed for monetizing current value ironically removes a fear of many investors, regulators, and legislators, i.e., that there will be too few quality public companies in which to directly invest?

Simply put, when one of the best-managed firms in a sector plans to leave that sector, it makes you wonder: a) why others won't do so, too, and; b) whether any decent firms will remain in the sector?

The more I consider these questions, the more I'm coming to the conclusion that Schwarzman and his management team see a confluence of important trends. Premiums for private equity buyouts, due to heightened awareness on the part of boards of targets, are rising, while the expected multiples on the exit end are unchanged, shrinking the expected returns to the sector. Too much liquidity is adding to this return pressure. Thus, excess capacity should be drained from the sector.

Seeing all of this, I think Blackstone's managers see the opportunity to cash in first on their perceived value, while most sellers and investors are unable to yet appreciate that, having done so, the Blackstone they will now own can't create the value of the firm that just went public.

This being the case, we should see a few larger shops follow Blackstone into the public markets, while the remaining private equity firms continue to ply their trade in a somewhat more profitable, if smaller, sector.

Like so many other economic challenges, this one seems destined to be worked out in the free capital markets of its own accord, long before any legislation can affect the sector, its constituents, or the eager investors waiting to pay up to own a share of the newly-public, former private equity giants.