Holding the Bag

Only two things hover around Wall Street’s deal makers: winners and losers.  Anyone who got caught holding the bag that Fortress and Blackstone left shareholders with after their IPO’s last year are well aware that you generally don’t want to buy anything a smart person is selling.  That was, for many at the time, the best sign of a top to the market, if only more of us heeded.

Knowing that most of us ought never buy a damn thing from a guy like Steven Schwartzman was not enough to prevent IPO chasers from doubling the company’s stock upon its initial offering.

What is it that drives people to make such mistakes?  Do we think that the people who have made all the money did it by giving up some of the vig?  Or do we think that owning something that was once of value to a smart person indicates that the asset itself is a smart thing to own?

Of course the obvious rebuttal here is that Steve still has a boatload of stock, and therefore by buying his shares you are invested alongside him.  But that argument only holds water if you believe that Steven is hanging on to his shares because he thought it would be a good investment.  If you buy that argument, I’ve got a bridge for you.  The mistake here is simply that many people confuse the price of an asset with its original cost.  Steven, as a founder was sitting on a cost basis next to zero.  The return on his investment, for only selling a portion of it was astronomical.  Anybody who bought Blackstone (BX) at or after the IPO simply lost sight of the fact that Steven did not need to sell all of his position to be able to monetize his wealth.  While most people paid $18 or more on the IPO day, smart Stevie of course has a cost basis approaching zilch.  In truth, it is most likely that he picked the largest amount he could sell without raising flags to other smart people that he just wanted to get out.  That is a good trader’s mentality.

If you can subscribe to the thought that nothing sold is worth being bought, unless a sale is forced, then you probably would rarely invest in the stock market, save for those really, really bleak days if you’ve got the stomach lining.  On the other hand, as we watch the vultures feast on Lehman Brothers’ unencumbered assets, those who can take advantage of a forced sale are likely getting a good deal.  Think Hank Paulson.

However, looking at some of the other assets, like Neuberger Berman, and the private equity franchise, one ought wonder how smart people on both sides of the table will consider valuation.  Some of the best value investors in the country work inside Neuberger, and some of the smartest private equity folks work for Bain.  In considering who is likely to win and who is likely to lose, given the constituents, its most likely that a win-win deal is structured and that they will share in the risk and in the upside.  That said, I’d bet that the losers of that deal wont be either of the counter-parties involved, unlike the Blackstone IPO the losers in that deal will be those left to the sidelines altogether.


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