Wall Street is a-twitter.
A handful of the wealthiest and most successful investors of the last three decades have announced their desire to sell.
I am speaking of Blackstone Group's announced $4 billion IPO and rumors that Leon Black will divest 10% of his firm, Apollo Management LP, to the public.
Blackstone Group and Apollo are both "private equity" firms. A private-equity firm is a large pool of money for making investments. The money is put up by wealthy institutional investors and is used to buy entire companies off the stock market. Once these businesses have been "taken private," the private-equity managers trim the fat, revamp the balance sheet (often with debt), and sell it to investors. When they're satisfied with the new company's condition, they sell it back to the stock market at a large profit.
The last few years treated the owners and investors of private equity to absurd profits. The Apollo sale would reportedly earn $750 million for Leon Black personally.
Depending on your point of view, this development is either an opportunity to buy into these legendary dealmakers... or a classic sign of a market top.
After all... why would men, such as Leon Black, whose firm recently raised $10 billion for just one of its funds, need to raise money from individual investors? The answers being sputtered from the well-groomed CNBC mannequins don't make any sense. They say, "Leon Black needs to have a publicly traded equity in order to have a 'currency' to reward and retain employees."
That's utter nonsense. Employees can be compensated with equity in a private company. And Leon Black, of all people, knows the value of equity. He made a fortune buying equity with a cheaper currency – dollars. The only reason he would consider selling equity in his own firm for dollars is if he knew the value of his firm was more than likely to decline.
In February 1929, Charles Merrill famously liquidated his firm's entire stock portfolio. Are Leon Black and his private-equity brethren ringing a bell at the top of the market?
Perhaps. But I don't think so...
Given the extraordinary growth in money under management at private-equity firms since 2003 and the increasing possibility that super-low interest rates have bottomed (cheap loans are critical to private-equity deals), I'd say Black and friends actions are wholly motivated by the circumstances of their particular industry and are not indicative of the market as a whole. In fact, witnessing how quickly the markets have recovered from the brief correction in February/March and the subprime debacle, I am more sanguine about the market as a whole than I have been in some time.
In fact, I think it's time to "go long" economic growth.
Investors have been forecasting a slowing global economy for two years. But oil prices and commodity prices have stubbornly refused to give in to the pundits (myself included). Commodity prices are rebounding strongly, suggesting that the world isn't going to slow down in 2007 or 2008.
Meanwhile, many of the most economically cyclical sectors of the stock market are priced as though a recession has already begun. Patterson-UTI Energy, America's second-largest drilling rig provider, is selling for six times earnings (and less than three times cash flow). Freeport-McMoRan Copper and Gold, the world's largest copper producer, is selling for less than eight times earnings and less than five times cash flow. Frontline Ltd., the world's largest oil shipping firm, trades for less than six times earnings.
These are all blue-chip companies, and the markets they serve are in multiyear bull run. Yet, judging by the market's valuation, all of these stocks should see their earnings cut by 70% over the next 10 years.
I doubt that will happen.
Good investing,
Porter
