Private Equity's Perfect Timing On Going Public

The Wall Street Journal ran an interesting article last week in their Heard on the Street column concerning private equity. Entitled, "Private Equity's Ultimate Buyout," the piece discussed the plunging prices of various formerly-private equity shops like Blackstone and Fortress.

Back in October of last year, I wrote this post on a similar topic. My point in that post was that Blackstone sold out to the public at a market top. I wrote, in closing,

"So, amazingly, I was correct in my cynical view that the best of the private equity shops either called, or defined the market top with its IPO."

The Journal piece goes further, noting how many billions of dollars of cash was taken out of these private equity firms by their founders, upon their initial sale of minor stakes to the public.

According to the article, Blackstone netted $2.6B, Fortress $1.3B, and even Apollo group took in $1.2B, after a cash dividend of nearly $1B paid to owners.

Of course, since their IPOs, all three firms' valuations have declined precipitously. Sure, the founders still had equity stakes in their firms, but with billions taken off the table, does that really matter now?

The Journal notes that the three firms' equity prices have declined between 85% and 95% since the respective IPO dates.

Which goes to prove my contention that you never, ever want to be on the other side of an IPO of any equity-oriented investment bank.

First, they don't sell at a trough. They are smarter than that. If they are selling, why on earth do you want to buy. Their very sale means they think the asset- their firm- is overvalued. In each case here, the founders were correct. If anything, you should consider buying puts on the shares, rather than buying the equities.

Second, these firms are not managed the same way when so much cash is off of the table. Either the founding owners can now take excessive risks with outsiders' money, or they might just take it easier, having realized billions in cash returns. Either way, the prior track records of prudent, steady returns is probably over.

I'm happy to say I never even considered buying an investment bank IPO. Goldman Sachs made us some nice returns in the past few years, prior to 2008. And we were out before its severe decline last year.

But, just on principle, you would never catch me buying when a private equity firm is selling a share of itself.