Blackstone is no different. As a private company it could sell 10% to another private company or hedge fund (which for all practical purposes is one and the same today). Buy choosing to go down the public road, what Blackstone is saying is that equities are fully valued today, perhaps even slightly overvalued. If the market wouldn’t assign a high enough premium, Blackstone would not be thinking less doing an IPO.

What strikes as a paradox today is the apparent ease with which private equity is raised! Surely investors must know that the market is fully valued. Oddly enough, investors are willing to give their money to private equity firms that in turn feed the M&A mania. The reasoning is actually simple and overlooks a major flaw in the logic.

Investors fear that a market correction which will suppress stock prices will occur again. No one knows when this will happen. Having just gone through a similar period where it took over 3 years to recoup, investors are tentative to the advice of their previous advisors (brokers and investment bankers). The new boys on the block, private equity, have a clean track record – at least this is the perception. The callings and promises of private equity are simplistic and readily accepted. Why hold paper (stock) when you can have the underlying asset? Simply put, the hedge funds are resonating; “buy the company not the stock”. Upon a market crash, investors are left with a company that continues to do business as before. Profits are the same, dividends the same, no paper losses to look at and all is fine and dandy.

This is the major thrust behind the majority of non corporate M&A activity. M&A activity associated with the likes of IBM and GE is completely different in nature, style, cost and outlook.

Blackstone Says It All

The flaw in the logic is just as simple. Just like no one can really promise an investor that a stock market crash will or will not happen, no one can guarantee that the underlying asset, the purchased company, will continue to perform as expected. In other words, if the market crashes, chances are it is due to a worsening economy. If the economy goes bad, then the privatized companies will not be generating the same profits as before. What Blackstone is pointing out to us all is that it makes no difference whether you are public or private. Upon a downturn all are effected.

Disclosure: This is the opinion of Saul Sterman, CEO CrossProfit and may not be the opinion of CrossProfit.com.