Friday Letter: Blackstone’s public peers

It seems almost quaint these days to hear GPs talk about which sectors they plan to target, given that the most lucrative business to own right now is an alternative investment platform.  

While we’re not sure how this line of business stacks up against, say, Internet search software or oil field services, we’re sure that it is hard to beat an IRR on a 1985 investment in a private equity management company. Take Blackstone, for example. The firm that was launched by Stephen Schwarzman and Peter Peterson in the aforementioned vintage year with just $400,000 last year reported a net income of $2.266 billion, according to Blackstone’s IPO prospectus. This is 58 times more than the profit realised by the firm in 2002.

Private equity leaders like to point out that, in the scheme of things, the industry remains a speck compared to the overall business universe. This is true, and yet once Blackstone is public, it will certainly be in the big leagues, at least initially. A quick look at the Fortune 500 puts a post-IPO Blackstone roughly in the top 100 most profitable corporations (of course, the public will only have claim to a sliver of those profits).

Among the closer net incomes to Blackstone’s in the Fortune 500 is that of FedEx, with $1.8 billion in 2006 net income, and No. 70 on the Fortune 500. Honeywell, No. 71, made $2 billion in 2006. Lockheed Martin, No. 52, made $2.5 billion. The profits for Goldman Sachs (No. 41) were $9.5 billion, so there’s plenty of room to grow.

And Blackstone’s assets continue to swell. All are aware that the firm is currently seeking to close on gargantuan private equity and real estate funds. Fewer in the private equity industry are aware that Blackstone manages $17 billion in fund of hedge funds assets, among other assets. From an AUM base of $21.7 billion in 2002, Blackstone has grown to $78.7 billion as of March.

Growing top and bottom lines, growing assets under management, a diversified business and a cutting edge industry – there is much to like about the Blackstone IPO. Much to like except, of course, the price the public seems willing to pay to access this investment. The IPO is expected to value Blackstone at $40 billion, or more than 17 times 2006 income. Lehman Brothers, by contrast, has a market cap of $38 billion and made $4 billion last year. Is Blackstone almost twice as sexy as Lehman Brothers? For Schwarzman, a former Lehman employee, the answer is an unequivocal yes.

NB. The Friday Letter is going out on Thursday this week because of the bank holiday weekend in the UK.