We are all quivering with excitement over the Blackstone IPO this week, but some, like Breakingviews.com editor Edward Chancellor, are looking further into the future. Because many of us at Dealbreaker hold or are pursuing advanced degrees in comparative literature with a financial sector specialization, we were fascinated by Chancellor’s piece in the June Institutional Investor: a fictional and dead-serious letter from Stephen Schwarzman to Blackstone shareholders, dated June 1, 2012, regarding the proposed buyback and delisting of Blackstone shares.
According to the letter, after Blackstone goes public this week, it will face five perilous years marked by “deteriorating economic conditions, extraordinary convulsions in the credit markets, a worsening political and legal environment for the buyout industry, and the consequences of what is not commonly referred to as the ‘private equity bubble.’” It will all culminate with a buyback at $15-per-share (a “substantial premium to current price”), about half of the anticipated IPO price.
As a document of 2007, the letter is more didactic than damning, saying of the “Private Equity Bubble,”
The entire buyout industry, including Blackstone, must accept its share of responsibility for our current woes. At the time of our IPO, returns from buyouts had been excellent, largely because both corporate valuations and profits had been rising in tandem for several years.
In hindsight, it’s clear that we became over confident. Too much private equity money was chasing too few opportunities. We found it difficult to resist the urge to raise ever-larger funds. And we put that money to work to quickly. In the takeover frenzy, many private equity firms were over stretched. There was a collective loss of investment discipline. Too many businesses were bought at large premiums when profits were near a cyclical peak. Given the fees on offer and the ease with which assets could be flipped only months after acquiring them, out actions were understandable.
Imagining a not-too-distant world in which Blackstone forsakes its listing [Institutional Investor]