Keith,

My broker says I’m a preferred client and he can get me into the upcoming Blackstone IPO. Should I invest?

Hugh, Phoenix, AZ

Heck no! Goldman Sachs showed a lot of integrity (something rare for investment banks) when they refused to value the Blackstone private equity group at $40B. It cost them the chance to underwrite Blackstone’s upcoming IPO, which means it cost them hundreds of millions in fees on a $4B, 10% stock offering.

Instead of applying a multiple to the total net revenues of the firm, Goldman Sachs insisted that Blackstone’s three component parts be valued separately, and then added. Much of Blackstone’s revenues come from the outsized fees it charges investors. As a former investment advisor I know how fickle that revenue source can be — especially when you don’t have an army or registered reps to hold investors’ hands during down periods. Blackstone does not have a retail sales force per se, such as Goldman Sachs’, or Morgan Stanley’s field force. When we sold our investment advisory firm, we received a multiple of seven times EBITDA — a very generous multiple for a firm our size. Blackstone believes it may be entitled to a multiple as high as 24 for their fee-based business. Even allowing for a higher inherent valuation for a firm their size, that is out of line with reality, in my opinion.

Meanwhile, Blackstone is not offering true shares. Instead, they will call investors “unit holders.” Those holders will have no right to vote for directors or to affect distributions from Blackstone’s operations, as most ordinary shareholders have. These are, as the Wall Street Journal calls them, “lite shares” at best.

I think Blackstone will be around for a long time, and that they will probably become a major player in the investment banking industry. However, I would wait for their shares to become, well, real shares, and for their value to shake out once the initial glow of the market’s first love for them wanes.

–Keith

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