BX, FIG, LAZ--hedges against a downturn, or vehicles to chase a dream?
+: track record, talent, access, connections, speed, cash...
-: change in tax regime in the US, increased protectionism/oversight @ national levels, public perceptions, founders cashing out, crowded space, excess...
Clarification added July 4, 2007:
Just in:
Seeking Alpha
Blackstone, While Buying Up the World, Adds Hilton Hotels
Wednesday July 4, 8:08 am ET
Tate Dwinnell submits: Yesterday, Blackstone Group (NYSE: BX - News) announced they were purchasing all outstanding shares of Hilton Hotels (NYSE: HLT - News) for 47.50, a whopping 32% premium for around 26 billion (including debt). Wow!
This comes within a year of Blackstone buying out CarrAmerica Realty for 5.6 billion and most recently Equity Office Properties for 36 billion. The buyout of EOP was a bit questionable and came at what many consider a possible top of the REIT market. Now there is the big Hilton buyout, which undoubtedly makes Blackstone one of the (if not THE largest) holders of real estate in the world (they now own 580,000 hotel rooms in 76 countries).
Wouldn't a purchase like this with a large premium have made more sense a few years ago, before global real estate prices went parabolic? Perhaps this is more about greed, ego and power than doing what's in the best of interest of shareholders. After all, Schwartzman already made his money with the IPO. You've got one unhappy shareholder here - I bought a very small position yesterday with expectations of some kind of snap back rally. Those expectations are gone after last night's announcement. I'll take a hit on Thursday.
I wonder if a few folks didn't catch wind of this deal going down at a few cocktail parties this past weekend? The stock was up 6% with volume more than twice the daily average… and with a pre-holiday half day of trading! The rich get richer. Surprise, surprise.
Clarification added July 11, 2007:
From Reuters:
WASHINGTON, July 11 (Reuters) - A senior U.S. Treasury Department official on Wednesday urged caution as Congress considers bills that would raise taxes on hedge funds and private equity firms such as Blackstone Group (BX.N: Quote, Profile, Research).
"While it is important to review our tax laws and policies, we must be cautious about making significant changes to partnership tax rule that have worked successfully to promote and support entrepreneurship for many decades," said Treasury Assistant Secretary for Tax Policy Eric Solomon in remarks prepared for delivery to a Senate Finance Committee hearing.
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Of course you've heard similar things in the past to the effect that nobody wants to scare PE away from the US public markets...
Clarification added July 12, 2007:
____________________
Hands Off Hedge Funds
By Sebastian Mallaby
From Foreign Affairs, January/February 2007
Summary: The massive growth of hedge funds has sparked warnings of instability and demands that the industry be regulated. But the fear of hedge funds is overblown, based on a misunderstanding of their role in the international Þnancial system. In reality, hedge funds do not increase risk; they manage it -- and policymakers, rather than clamping down, should make sure hedge funds have the tools to perform this function well.
Sebastian Mallaby is a Washington Post columnist and the author of The World's Banker: A Story of Failed States, Financial Crises, and the Wealth and Poverty of Nations.
Good Answers (5)
Byrne H
SEO Copywriter, Online Marketer
Best Answers in: Equity Markets (3), Hedge Funds (2), Bond Markets (1), Commodity Markets (1), Option Markets (1)
They aren't great hedges against a downturn, since they're leveraged bets that the current hedge fund boom will continue. We're living in an extraordinary time in financial history, when lots of previously uncorrelated assets are moving in lockstep, so if you want a hedge, you don't want something like BX or FIG -- leveraged bets on leveraged bets on the status quo.
Maurizio P
Director at S&I Savings and Investments Ltd.
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I totally agree...there is also a high probability that a change in perceptions will cause the opposite phenomenon, that all correlations will go to 1 on the downside. The only bet you can honestly place safely is look for stable, big, non correlated with equity or bonds Hedge FoF, with a long real history ( no btests..) and you'll see the returns you may realistically achieve are 3/4 percentage points above stock (that carry an average long term return of 6.5% in the last 20/25 years) on a 15 years span.
That will reassure you on the resilience of those structures, as they will have passed a major crisis (LTCM and Russian bonds meltdown).
The risk/return curve is rigid in the long run, you can't defy it. If you are aiming for 15% or higher..you are taking risks that have not a linear correlation with the returns, but an exponential one, due to the nature of the curve.
Wolf R
CEO, EastBanc Technologies
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To use Blackstone, Fortress, and Lazard as hedges against a downturn to me sounds like taking a water hose to protect against the oncoming rain, Flavius... Good instrument, nothing wrong with it in general, except it is the wrong instrument for your intended purposes.
In my simplifying mind, what does it mean to hedge against x? You are sufficiently convinced of x' probability that you take bet against x' opposite (a continuation of the boom). In its most aggressive form, this means that you are buying yourself into an instrument that will cost you money (that you can make up with hedges with the same correlation as x like the three you mentioned, or even more conservative ones, of course, but that's not your question), if x does not occur. Your x is a downturn, a recession. A recession expresses itself in major stock indexes turning South... How do you bet South? You short, or ultra-short derivatives off the indexes. Simple as that... This would equal a flamethrower as your instrument against the rain in our watery picture above. Not only will it evaporate the rain drops, but actually get you comfortably warm (more than make up for your losses elsewhere, and make you lots of money)... If the rain doesn't come, and you forgot to hedge in favor of x, you might find yourself unpleasantly charcoaled (you're not earning money elsewhere, and the flamethrower will burn you: e.g. margin calls)...
Now, Maurizio pointed you to the umbrella... Maybe, a combination of all of these (and some other instruments) will nicely insulate you, so that you don't even know what the weather is like out there anymore... But that may not provide the thrill ride that some (not me!) seek in today's markets...
My 2 cents.
Wolf
fCh -
While all the positives and negatives you mention are valid, the problem statement is really a simple question: Why would any hedge fund go public, particularly since the idea of an equity structure is to raise capital and that's exactly what most hedge funds are flush with?
To cash out is the logical conlusion since the costs and risks of running a public company are much higher than private (Sox, filings, PR, regs, etc.) evidenced by the recent trend of many billion dollar companies going private.
If the conclusion above is valid, then the BX, and FIG types provide neither a cushion in a downturn, and likely reach stock based saturation as more funds go public. Opportunity based saturation for the large funds is another significant challenge--there are only so many, good ones that is, and a dilution of return on investment becomes inevitable, thus the dream is unlikely to produce even a double digit return. I don't see mutual funds and institutional investors propping up the prices of their number one competitor, either.
Fortress, Blackstone and other firms with huge warchests and top talent are in this for a long run, they will hold on to strategic investment and ride out the cycle. It is absoulte return over long run they are after...
Clarification added July 9, 2007:
Top financial services firms like GS and MS who are currently heavy into PE activities as well, and do not have the banking side behind them like JPM or Citi, will find their space getting more and more crowded...thus global macro environment will be even healthier for years to come.
