Shares of Blackstone Group sank below the price they fetched in an initial public offering last week, as the bailout of a Wall Street hedge fund raised the specter of higher borrowing costs and took the shine off one of the largest IPOs ever.
Blackstone fell $1.69, or 5.2 percent, to $30.75 on Tuesday. The stock was sold to investors last Thursday at $31, spiked in its first day of trading to close at $35.06 on Friday, but then sank some 7.5 percent on Monday, setting up Tuesday’s decline.
Cowen & Co. trading analyst Mike Malone said the well-publicized troubles at two hedge funds operated by Bear Stearns Cos. are forcing investors to evaluate how easily Blackstone Group can raise money.
“It’s been a perfect environment for Blackstone over the course of the past several years,” Malone said. “Interest rates have been low and valuations on equities have been relatively cheap. If interest rates were to rise, that dynamic would change.”
Earlier this month, Merrill Lynch & Co. seized $850 million in collateral from a hedge fund called the Bear Stearns High-Grade Structured Credit Fund. The fund had lost more than 20 percent in the first four months of 2007, and Merrill Lynch, which lent money to the fund, worried it would be unable to repay the debt.
While Bear Stearns lent the fund $3.2 billion to assure other creditors their investments were safe, Malone said the bailout means some lenders may demand fatter interest rates for risky loans like debt used to leverage buyouts of public companies.
Under the private equity model, firms like Blackstone Group buy public companies, saddle them with debt and later sell them at a profit. Higher interest rates eat into the return on these types of investments and make it more difficult to raise money.
If lenders with shrunken risk appetites demand higher interest rates for private equity financing, Blackstone Group would have to pay to lenders more of the investment profit the firm currently pockets.
UBS Investment Research called this prospect “unlikely but scary.” Investors shying away from lending to private equity firms would choke off Blackstone’s access to loans and diminish the firm’s ability to cut deals, the firm said.
When Blackstone Group LP filed in March to sell shares of itself to the public, many people speculated the initial public offering signaled the end to the land rush in private equity.
Chief Executive Stephen A. Schwarzman, some suggested, foresaw an end to the easy money and cheap stocks that fueled a takeover boom.
Amid all the focus on the IPO’s weak performance, Schwarzman pulled out as a keynote speaker at a conference on Wednesday sponsored by The Wall Street Journal. A spokesman for Blackstone said Schwarzman was unable to attend.
Peter S. Cohan, president of management consulting and venture capital firm Peter S. Cohan & Associates, said the “golden era” may be over for private equity.
“Blackstone’s investors don’t want to stick around for the scary part of the movie,” Cohan said.
