Should you buy into private equity?

Bob Moon Jun 21, 2007

Should you buy into private equity?

Bob Moon Jun 21, 2007


Bob Moon: Having made a huge fortune buying fixer-upper companies and putting them under its private control, the buyout powerhouse known as The Blackstone Group is going public today, selling shares of itself to investors.

The takeover-management firm controls such corporate names as the cable operator Adelphia Communications. The investment managers who run the operation for their rich investors could walk away with their own stake in the company valued as much as $7 billion.

So what’s in it for the average investor? Well, let’s go back to the slick image of the private-equity guru in the movie “Pretty Woman:”

Consider, if you will, the slick image of the private-equity guru in the movie “Pretty Woman”:

Vivian Ward played by Julia Roberts: So what do you do?
Edward Lewis played by Richard Gere Well, I buy companies that are in financial difficulty.
Roberts: If they have problems, you must get ’em for a bargain, huh?
Gere: Company I’m buying this week, I’m getting for the bargain price of about one billion.
Roberts: A billion dollars?
Gere: Yes.
Roberts: Wow, you must be really smart, huh?

If these guys are so smart — and they’re widely respected as the smartest and most sophisticated investment minds around — what if you could invest in them, in the deal-makers who are behind all those huge acquisitions we’ve been hearing about lately?

At the Tuck School of Business, private equity expert Colin Blaydon says this could be your chance: Blackstone isna€™t the only one of these secretive firms thata€™s been maneuvering to sell shares to the public.

Colin Blaydon: It does permit the rest of us out there who are not the billionaires to be able to perhaps invest in this sector and realize some of the kinds of returns this sector has been generating.

But don’t get the wrong idea. If you buy stock in one of these investment firms, Andrew Metrick at the Wharton School of Business says you should know you won’t be buying a piece of say, Chrysler, which is being taken over by a private equity company. You’re buying stock in the dealmaker.

Andrew Metrick: They’re not going public to get funds to invest in companies. They are selling a share of the management company which captures fees based on those investments.

Sort of like buying a share of Fidelity Investments, he explains, instead of investing directly in one of its mutual funds.

So why now are these savvy investors offering us a share of their future profits? The skeptics think the answer to that question might be right out of that scene in “Pretty Woman.”

Roberts: Wow, you must be really smart, huh?

Maybe smart like a fox. Remember the dot-com craze? Boston University’s James Post wonders if the deal-makers just figure the time has come to cash in on their reputations before private equity mania reaches its peak.

James Post: You really run the risk of being the last person in when everybody else is starting to look to the exits. Thata€™s a bad place to be for any investor.

Yes it’s risky, but there are those alluring returns. And despite all those cautionary flags, many analysts say Blackstone’s big launch is likely to be one of the largest initial public offerings in U.S. history, certainly the most lucrative in recent years, raising close to $4 billion.

And thata€™ll be taxed a t a relatively low rate that some congressional critics are now pushing to hike dramatically.

I’m Bob Moon in Los Angeles. Thanks for joining us.

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