Blackstone's IPO & you: Risk capital only

Private equity firm Blackstone Group, whose 133.4-million-share IPO priced Thursday night at $31.00 per share, manages $88 billion in assets, including about $20 billion in a buyout fund. Blackstone posted Q1 2007 earnings of $1.1 billion -- a total that more than doubled its Q1 2006 performance. Among other operations, the firm deploys a well-honed strategy of investing in companies with potential for growth and operational improvement, fixes them up and then, hopefully, sells them at a higher price. To date, the firm has been generally successful, and it gives better-than-above-average indications of continuing that success in the immediate years ahead, barring a sustained U.S. or global recession, and that in part explains the strong demand among institutions for Blackstone's shares.

Still, Blackstone's track record alone does not lead to the near-mania interest regarding its IPO. The IPO was multiple times oversubscribed, which is Wall Street terminology for "there's strong demand for this stock among the large, powerful institutions who buy and sell stock." What magnified the demand, aside from Blackstone's performance? It could be the very nature of Blackstone's investment vehicle itself, and the current economic environment.

Regarding investment vehicle, Blackstone is a private equity firm, and right now on Wall Street, private equity is king. Or at least close to king. For a multitude of reasons (liquidity, tax laws, demand for return/yield), private equity has been a convenient vehicle for institutions and wealthy individuals to deploy capital, and it looks like it will continue to be for the foreseeable future. Hence, one could argue that Blackstone hit the market at the right time.

Second, and perhaps equally significant, global capital flows are running in Blackstone's favor. Simply, there's a great deal of capital in the world today, in the U.S., in Europe, in Japan, in China, in other emerging markets, and not all of it can go into U.S. treasuries. Some of it has to be put to use to earn a larger return. A considerable portion of that money is finding its way into private equity firms, and Blackstone is surely benefiting from that global reality.

So in the Blackstone case, one has a superior firm, with a timely vehicle, and with an abundance of return/yield-seeking investors waiting to deploy capital behind it.

The Risk

Given the above positives, the question remains, is the Blackstone IPO right for you?

If you're looking to flip shares -- quickly buy and sell your shares for a profit -- probably not. Blackstone's $31 IPO price is likely to rise substantially in the first 30 minutes of trading, and it's not likely that you'll be able to buy in at a low enough price to quickly flip the shares and earn a profit.

Similarly, if you're a low-risk or moderate-risk investor, the Blackstone IPO is not for you. IPOs are inherently risky investments -- most involve young companies or firms -- and there are dozens of micro- and macroeconomic factors that can ruin the best-laid plans, and reduce your investment to zero. Quickly.

However, if you can tolerate high-risk, specifically if you have risk capital to deploy, and an investment horizon longer than three years, and you can tolerate a 50%-70% drop in your shares' price, you may want to consider buying some BX shares. But it should be underscored that the money you use to buy BX should be risk capital -- that's money you don't need to pay your mortgage and that will not change your life circumstance if you did lose it.

If that sounds cautionary, that's because it's intended to sound cautionary: Investing in even the most promising IPOs is an inherently risky endeavor. And unlike the major institutions, the typical person does not have large amounts of capital to draw on, in the event the IPO, or the company, doesn't perform as projected.