[Editor’s Note: We’re launching some new regular features and “The Big Idea” is the first of them. That nifty logo you see to the left will tip you off that we’re about to engage in speculation, guess-work and commentary about the Big Idea of the day, the week or the month. This isn’t the realm of breaking news or even linking to news broken elsewhere. The inaugural Big Idea begins by asking what seems an obvious question in light of all the talk of hedge funds and private equity firms going public: What about Goldman Sachs?]
“Will a hedge fund become the next Goldman Sachs,” asks Jenny Anderson in today’s super special DealBook Section of the New York Times. There are all sorts of problems with this idea, not the least of which is that while the hedge fund in question—Citadel—is growing in all sorts of new and strange ways it hardly seems to be growing into anything like a full-fledged investment bank. “Citadel has elements of an investment bank disguised as a hedge fund, minus the investment bankers,” Jenny admits. So, yeah. No. Not an investment bank. Not Goldman Sachs.
We can’t help but wonder, “Could this work the other way around?” With all the talk of hedge funds and private equity going public, one story that’s been overlooked is the possibility that Goldman Sachs might spin off its hedge fund business. Goldman broke new ground when it abandoned its traditional partnership structure and let the public buy pieces of its equity at the turn of the century. But that was then, and this is now. And surely Goldman Sachs has not reached its Hegelian end-state. The end of history of the history of Goldman is a ways off yet, and the next step might be a spin-off of its profitable trading business.
That will come as a shock to some who have come to regard Goldman Sachs as a hedge fund disguised as an investment bank—but is it really so far-fetched? But the proprietary trading business—basically, Goldman trading for Goldman—has been a strong profit and growth engine for the bank, so strong that some wonder whether this piece might be far more valuable as its own entity.
Surely there are some people inside Goldman Sachs proprietary trading business wondering just how much their little corners of the investment bank might be worth if it wasn’t dragged down by the fee-gobblers in investment banking and credit groups. A free-standing GS Prop Trade would surely face some risk from facing the markets without security of Goldman’s other businesses behind it. But these guys are risk machines, and have been ratcheting up their risk tolerance for some time.
Would the rest of Goldman let the traders go? Perhaps. A spin-off might also help the other businesses at Goldman. It could refocus those parts of the firm that remain behind on their core business, and eliminate the always present suspicion that while a clients dealt with one side of Goldman the other side might very well be trading against the client’s interests.
What’s more, it would empower the investment bankers over the part of Goldman they get to keep. With the departure of Hank Paulson and the rise of Lloyd Blankfein and his trader buddies, some other parts of Goldman have been chafing. There were, of course, those old reports of the partners fighting like ferrets. Could divvying up Goldman bring peace to Broad Street?
We haven’t heard anything more than cocktail party chatter along these lines—and we’re not sure you should place all that much confidence in the opinions of the sort of people who attend the sort of cocktail parties we frequent. The recent performance of Global Alpha—down 2 percent for the year when hedge funds have had an average gain of 1.9 percent—probably isn’t exactly lighting a fire beneath the fannies of would be Prop Trading Secessionists. But, you know, it’s in the air.
And we can’t help but smile at the ironic image of Prop Trading stealing away into the night with its own spin-off at the very time when Goldman’s investment bank is out pitching so many other hedge funds and private equity firms on their own IPOs.
IPO
There’s no Apollo IPO in the works and Apollo has not hired any investment banks to get the process started, says Andrew Ross Sorkin, fresh from the high of his takeover of the Business Section of the New York Times (technically, the B.S. still exists but it’s clearly now redundant and will be phased out).
Sorkin takes the Wall Street Journal/Deal Journal theory of competing banks and pushes it a step further—he says the deal isn’t even “in the works.” Except maybe in the hopes and dreams of bankers at Goldman Sachs and J.P. Morgan. What’s more, he says that Apollo did go to hear an investment bank pitch an IPO yesterday—but that bank was neither Goldman nor JP Morgan.
One problem: It’s not true. Apollo is not going public next month, nor the month after that — and probably not the month after that either.
People close to the firm told DealBook they have not hired any investment banks, and while they have held meetings with bankers pitching such an idea, they have not even decided to take the initial steps to pursue it.
As recently as Tuesday, Apollo’s senior executives met with an investment bank — not Goldman Sachs and J.P Morgan — to hear their pitch, these people said. One option on the table is to sell a small stake in the firm to a prominent investor as a way to create some liquidity and set a floor for any future offering or sale.
So what’s with the rumors? Goldman Sachs and J.P. Morgan, which were both left out of Blackstone Group’s proposed initial public offering, appear desperate to take another private equity firm public — and so they may be not-so-subtly pushing Apollo into the market. (Talk about client service!)
Sorkin’s sources denying the Apollo IPO story at least sound a bit closer to Apollo—literally, since he describes them as “people close to the firm”—than the Journal’s unnamed people who are familiar with people. So this sounds close to an actual denial, rather than the double-blind non-denial we prated on about this morning. But is it really credible that Goldman and JP Morgan have just made up this story, hoping that reality will catch up with them?
So far all the reports–CNBC’s, the Journal’s and the Post’s–do seem to come from sources at the banks. So the question is who is getting played by their sources: Sorkin or everyone else?
Apollo Close to an I.P.O.? Only in Banks’ Dreams [DealBook]
One storyline that is clearly emerging from the various private equity and hedge fund IPO rumors and reports is that the investment banks are gunning hard for this business. And they’re not waiting around for hedge funds to decide to go public—they’re pitching, even pushing, the idea of launching a public offering on the firms.
“All over Wall Street, bankers are pushing private-equity shops to move quickly, reminding them that market conditions could deteriorate and diminish investor appetite for any offering,” Wall Street Journal reporters Katie Kelly and Robin Sidel write in today’s paper. “In this case, however, it isn’t clear whether bankers are more concerned about a capital-markets slowdown or getting a high-profile deal to the finish line before rival firms attempt to do the same.”
A sign of how ultra-competitive the investment banks have become for this business is the public attention paid to the fact that Goldman Sachs was not included as an underwriter for the public offering of Blackstone partnership equity. There was a lot of speculation about why one of the premier banks on Wall Street (yes, yes, Broad Street, we know, “Wall Street” is a metaphor or a synecdoche here) was left out of a deal that seemed to include every other bank on the Street. Was it because Goldman “called bullshit” on the Blackstone IPO, as some said? Or was it personal animosity between the higher-ups at Blackstone and some prominent Goldman personages? Or—and we’re sorry there are so many “ors” here but that’s just the way the world is—was it that Blackstone was hesitant to let Goldman—which competes with Blackstone in many of its businesses—do much digging into its books in preparation for the offering.
If the reports of an Apollo IPO—a story broken by CNBC’s Charlie Gasparino yesterday and carried several millimeters forward in today’s Wall Street Journal and New York Post—are correct, then it seems we have the answer: Goldman couldn’t take the Blackstone business because it was already working on the offering of its competitor. Now Goldman is famous for finding creative ways to cleverly untie seemingly Gordian knots of conflicts—but underwriting two competing private equity IPOs might have been too going too far.
That’s the story as we’ve heard it. But the boys at Deal Journal have an alternate reading of the Apollo story. They write that the Apollo IPO isn’t so much of what kept Goldman out of the Blackstone underwriting syndicate—it’s a consolation prize for the banks, a bit of business they apparently pushed to get after being shut out by Blackstone. Of course, Deal Journal has been a big proponent of the Blackstone In Competition With Goldman theory, and this take would allow them to leave that notion in place. The Apollo Conflict theory, in fact, undermines the whole idea that Goldman was shut-out.
Of course, we’re probably just counting our eggs while they are still in the bush. Or however the saying goes.
The Washington Post’s Allan Sloan rails against the partnership equity structure and the tax structure of Blackstone but is good enough to indicate why he’s been paying so much attention to the private equity firm: because they had the nerve to raise their profile with the IPO.
If you’re wondering why people like me keep writing about Blackstone Group, the big private-equity player, there’s a simple answer: The whale that comes to the surface gets harpooned. And whales don’t get much bigger than Blackstone, which lately seems to be bidding on every asset in sight.
When private-equity firms and hedge funds kept low profiles, they were well out of harpoon range. They benefited from an enormous tax loophole that few but the cognoscenti knew about and a nice legal loophole that’s familiar to people in the world of partnerships but that I’d never heard of until last week. These things have now emerged into public view, thanks largely to Blackstone’s bid to become a publicly traded company. The harpoons are flying — as well they should be.
That’s a refreshingly honest view of the way journalists find their targets, and one that hedge funds and private equity firms considering going public may want to keep in mind. There’s a risk of invoking the prating wrath of the chattering classes.
Ahoy, Blackstone, and Ready the Harpoons [Washington Post]
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Hedge Funds
The Next Hedge Fund IPOs: Avenue Capital, Perry Capital and the Citadel Investment Group
By John CarneyEven as private equity giant KKR announced the latest giant bid to take a company private, more hedge funds seem poised to make the opposite move and jump into the public markets with equity offerings.
The Fortress Investment Group’s public offering earlier this year set a precedent, a model if you will, for how to take pools of private capital into the public capital markets. And, perhaps more importantly, created several new billionaires among its principals, inspiring would-be copycats through the hedge fund and private equity world. Less than two months after the Fortress IPO, Blackstone announced its own plans to sell partnership equity to the public and rumors persist that another large private equity firm—perhaps KKR—is getting ready to follow suit.
An article on Fortune’s CNN feed today explores the question of which hedge fund might be next up on the IPO block. The three most likely candidates it names are Avenue Capital, Perry Capital and the Citadel Investment Group.
Perhaps most tantalizing of all, however, was this little detail in the articles lede.
On the night before Fortress Investment Group became the first hedge fund to trade on the New York Stock Exchange, Wesley Edens and the other four principals celebrated in a manner that befits the firm’s intentionally low-key profile. They gathered at a bar on the Upper West Side of Manhattan.
Of course, DealBreaker wants to know more. Which bar? Where do you go the night before you become a billionaire? Any guesses? Leave a comment or send an email to tips(at)dealbreaker(dot)com.
Predicting the next big hedge fund IPO [Fortune on CNNMoney.com]
Are we witnessing the beginning of the end of the public corporation? The arrival of the Blackstone private equity has given rise to the idea that the publicly held corporation—which has dominated the business model in the US and much of the world—may be in eclipse. Blackstone offers shareholders a very different mix of rights and opportunities than a typical public corporation, according to Larry Ribstein’s column in The American.
While the business columnists prate about “shareholder democracy,” this prospectus shows us where business is really headed. These partnerships make publicly held corporations, which activists disparage as dictatorships, look like New England town meetings. The owners are not protected by voting, shareholder proposals, majority voting for directors, or any of the other paraphernalia of the publicly held firm. Rather, the owners’ solace lies in the regular distributions of cash, the managers’ high-powered incentive compensation, and the portfolio companies’ debt load, which concentrates their managers’ attention producing enough cash to avoid bankruptcy.
Why should shareholders be willing to forgo so many of their long-earned traditional rights? Largely because the partnership model—with its limited rights for common equity holders—has been winning in the way that counts the most: money. Private equity companies, in particular have been making a lot of it. And now the public is apparently craving a chance to stick its fingers into the pie.
This is almost a counterpoint to the story about public corporations adopting private equity style debt levels. As we noted this morning, the problem with modeling a public corporation after private equity is that you take on the risks faced by a private equity shop’s portfolio company—namely, higher debt maintenance costs—without eliminating some of the more onerous costs of the public company form—agency costs of a non-owner management, litigation, government regulation and activist shareholder uprisings.
But Ribstein isn’t sure what he calls the “Privlic Company” model is the wave of the future. It is threatened by the IRS—which may not permit Blackstone to continue enjoy the tax benefits that have helped make it so profitable one it becomes public—and has yet to be widely tested. If shareholders get burned in the Blackstone deal, they may turn against the structure.
Going Privlic [The American.com]
The war against Blackstone’s valuation continues. Yesterday we noticed that someone seemed to be suggesting to Reuters that Blackstone’s $40 billion valuation was what caused Goldman to walk away from the deal. (Incidentally, the consensus among our readers is that this story is completely implausible and was probably planted by Goldman itself.)
BreakingViews has another critique. Noting that the valuation would make each of Blackstone’s 770 employees $50 million, BreakingViews, wonders how Blackstone’s business can really command that kind of valuation.
Financial firms, which generally operate under more competitive conditions, tend to have lower valuations. The 27,000 heads at Goldman Sachs Group Inc. are priced at a modest $3.2 million on average. Businesses with cast-iron franchises can be worth more. For instance, Moody’s Corp., the credit-ratings business, has a market valuation per head of $5 million.
That sounds persuasive but keep in mind that this “per employee valuation” is only measuring half of the equation (at best). It is discounting additional productivity by, well, 100%. What about those enormous per-employee earnings we saw in the IPO? Measured on a per-employee basis, Blackstone made ten times as much as Goldman did last year. With $3 million in earning per employee, Blackstone’s is valuing its employees at only a 16.6 multiple. Put it that way and the Blackstone’s IPO doesn’t sound as outrageous.
Update: An anonymous reader proposes that this 16.6 multiple makes each and every one of Blackstone’s a candidate for a personal private equity buyout. “All a 16.6x valuation means is that Blackstone contains approximately 770 buyout opportunities. . .the only difference is that Blackstone isn’t getting the proceeds. Goldman could come in and buy almost any of their employees away,” the reader explains.
Too Valuable? Blackstone’s IPO Would Put a High Price on Staff [BreakingViews in Wall Street Journal]
Speculation continues about why Goldman Sachs and JP Morgan Chase were shut out of the Blackstone IPO. The latest theory–basically that Goldman scoffed at the idea that Blackstone is worth $40 billion– comes our way from Reuters.
Goldman, JPMorgan and Blackstone are declining to comment on why the two banks were left out. Morgan Stanley, Citigroup and Lehman also declined comment.
One possibility is that Goldman agreed to be an underwriter but disagreed with Blackstone over its hefty valuation, said Lawrence White, a professor of economics at New York University’s Stern School of Business.
Right now, the deal is expected to value the entire company at $40 billion. Blackstone last year earned $2.27 billion, according to its filing.
We’re not sure if we buy this one. It sounds a bit like someone at Goldman might be trying to explain away the firm getting shut out, and delivering a nasty dig at Blackstone in the process.
Goldman, JPMorgan absent from Blackstone IPO [Reuters]
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Blackstone
Blackstone Rocks The Bucks: The Blackstone Ticker Symbol Revealed!
By John Carney
BX.
“Word around Wall Street this morning was that the private-equity firm has settled on BX as its stock-listing handle, after considering a number of two and three-letter monikers,” Deal Journal’s Dennis Berman reported this afternoon.
Why BX? As in “Bronx?” Or “bitter-ex?” Or maybe “Beware: Crossing?”
“As in bucks. Lots of bucks,” Berman writes.
Blackstone’s Ticker Symbol: It’s BX [DealJournal]
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After Amaranth
It’s Going To Reach Out And Grab Yah! Blackstone’s Business Plan
By John Carney
Writing about Wall Street for Time Magazine is a bit like writing about Williamsburg nightlife for the New York Times. Most of your readers have no idea what you’re talking about, so you can get away with almost anything. It probably gets a bit frustrating to know that none of the people you write about ever notice you but as a trade-off they never write angry letters to your editors either.
Still, Mike Kinsley’s take on the how Blackstone’s business works is pretty much just as clear as what Blackstone describes in its prospectus:
What do Schwarzman and Blackstone do for all this money? Oh, this and that, but mainly they buy publicly traded companies, take them private (that is, replace the public stockholders with private equity from institutions and rich individuals), do some abracadabra that increases the companies’ value and then take them public again.
We’d say that “it’s all done with smoke and mirrors” but the drug references are getting a bit heavy today.
Abracadabra for Sale [Time Magazine]
One reason that you’ll read so many similar stories today about that Blackstone prospectus: everyone’s writing about the same stuff because there’s not much stuff to write about. It’s got more holes than the septum of a Goldman commodities trader! Jonathan Keehner at Reuters explains that investors will get “precious little insight into the affairs of the behemoth or any real control.” How do you spell “blank check?” Oh, right. Like this: Blackstone.
Jenny Anderson explains why Blackstone is confident that it can convince investors to fork over money despite the blank-checky-ness of its prospectus. “Wall Street knows how to keep score. It’s called money,” Jenny writes. And Blackstone seems to mint it somewhere inside its offices.
Larry Ribstein says that the Blackstone structure may be a peak at a dawn of the new era: the Age of the Public Partnership. He’s not sure the publicly traded company model will work for private equity but he does think that Blackstone signals a move away from public companies toward partnerships. We’re reminded that this Blackstone structure will help the ‘Stoners avoid a lot of the things that currently plague public companies—activist shareholders, the threat of shareholder democracy, income taxes. The only question is how long lawmarkers will allow this exit from the corporate form if it starts to become popular.
The Financial Times says that the Blackstone IPO is all about acquiring “permanent capital” that doesn’t need to be returned to investors and will help the ‘Stoners smooth out the business cycles that have plagued the private equity industry. It’s like cutting the Gordian Knot of question of a private equity “market top”: Blackstone may be able to keep to dealflow coming even if the credit market dries up because it will be able to tap into public equity market.
Why were Goldman Sachs and JP Morgan Chase left out of the Blackstone IPO bonanza? There’s been lots of speculation that “this time it’s personal” when it comes to Goldman. As DealJournal has pointed out, Goldman and Blackstone compete in a lot of the same businesses and the ‘Stoners might not have wanted to let team GS in to see the family jewels. One problem with this theory is that the Blackstone prospectus offers so little information, it’s not clear that any of the underwriters got to look very far into the Blackstone books. (Another theory raised by CNBC’s Charlie Gasparino was that Schwarzman’s still bitter about former Goldman boss Hank Paulson getting tapped as Treasury Secretary.) The New York Post has another idea: the KKR IPO! “Those banks along with others are said to be working on the IPO of another big buyout firm rumored to be Kohlberg Kravis Roberts & Co., run by Wall Street legends Henry Kravis and George Roberts,” the Post’s Zachery Kouwe writes.
Last night a friend of ours wondered if Steve Schwarman might drop his $350,000 salary in the backseat of a cab after celebrating the IPO one night. Like a spare umbrella or a girl you met at The Anchor. “It is disclosed that Stephen Schwarzman’s salary will be $350,000. But that’s just the money he uses to tip coat-check ladies,” writes Justin Fox in the Curious Capitalist, a Time Magazine blog on business. Who knew Time writers were allowed to be funny?
Schwarzman’s salary leads Dana Cimilluca to remark, “While it would be considered good take-home pay for most, for Schwarzman it probably would cover a mere slice of his birthday cake.” But don’t forget about his equity. He gets to have his cake and eat it too!
Dana also claims first prize for being the first to ask: Is Blackstone The New Goldman Sachs?
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