Private Equity: Hype or the Real Deal?

The biggest buzz in investment circles lately is the private equity blitz. These companies, which typically buy established enterprises and then sell-off the profitable constituents for a big profit, are now raising funds to go public.

The most successful of these companies over the years, Blackstone LP, has earned an absolute fortune for its employees over the last 20 years -- much more than the average Goldman Sachs employee. Neither Blackstone or its founders need the additional $4 billion dollars they're raising on Wall Street shortly. So what gives? Why would such a highly-prized private equity outfit seek additional funds from the public?

Blackstone is pretty smart. They realize that this is the ideal time to seek outside financing for additional funds. It's almost free money. The stock market, until recently, has been extremely receptive to new offerings and an IPO now will reap its founders a bundle. Last month, Fortress Investment Group LLC, a large hedge fund, raised close to $1 billion dollars in an offering. Again, these guys didn't need the money. But heading to market when it was hot proved to be great timing.

Is private equity, now clearly going mainstream, for you?

My answer is "maybe."

The time to buy an initial public offering is pre-IPO, if you can get in on the ground floor with the underwriters of the deal. But since most of us can't buy pre-IPO, I suggest waiting several months or for another stock market correction before buying Fortress or Blackstone. Both are extremely profitable companies and I see no reason why they won't continue to remain prized cash-flow generators. So yes, I'm going to buy these companies when prices head much lower, if only temporarily.

But make no mistake about it. Just because a label has a "private equity" bill attached to its name doesn't mean it's a 100% quick-fix, either.

Carl Icahn, the big venture capital corporate raider, recently invested millions in Motorola's common stock; yesterday, the cell-phone manufacturer announced poor earnings and slashed its 2007 earnings guidance, driving the stock down 6% to a 52-week low. Not my idea of a Corporate Raider.

I'll let you know when to scoop-up shares of Blackstone. I have no doubt we'll eventually see a lower share price after this offering hoopla. Stay tuned.

Have a nice weekend. See you Monday.

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