Another day, another titan of the financial industry gets a first-hand idea of what it feels like to go bungee jumping off a cliff… without a bungee cord.
On March 10, the leading U.S. private equity firm Blackstone Group was transferred to I.C.U. – Imploding Credit Unit. The company’s stats: Fourth quarter ’07 earnings plunged 89%, alongside two failed buyout completions, soft results from its two biggest divisions, and a 60% slide in its public stock price.
According to a same-day New York Times report: The celebrated buyout firms of 2007 “are seeing the handwriting on the wall. They’re staring into the jaws of hell… No one saw this kind of outcome.”
If by “no one,” they mean the mob of mainstream-goers racing to get on board the bullish buyout bandwagon back in 2007. At the time, private equity takeovers soared to a historic high of $3.66 trillion, topping the previous record set in 2000. And, Blackstone Group’s very own chairman, a man who once openly dismissed the I.P.O. market as “overrated,” was actively pursuing going public.
“All Aboard the M&A Express,” cheered a January 2007 news source. “If you were a betting man, you would see the boom times continuing as far as you can see out. It’s hard to [imagine] a catastrophe happening or even one or two things that could take the wind out of the sails of the market.” (Times Online)
And, this June 1, 2007 Bloomberg: “The private equity world is in its golden era right now. The stars are aligned. There’s no end in sight to the frenzy.”
For our analysts, however, the prospect of “one or two” things taking the wind out of private equity’s sails was not a matter of imagination. It was reality. On this, our April 2007 Elliott Wave Financial Forecast kicked off a series of discussions regarding the dramatic fall from grace in store for the high-risk world of venture capitalism. Below is a thumbnail view of these observations:
April ’07 Elliott Wave Financial Forecast: “Considering Blackstone Group’s recently announced IPO, anyone investing in the frothy realm of private equity buy-outs should keep this aphorism in mind: When the firm that is famous for taking companies private goes public, the jig is very likely up for the whole game too.”
May ’07 Elliott Wave Financial Forecast draws a parallel between the modern-day investment syndicates AND the pool operations of the late 1920s: “When the trough turns out to be a way station on the way to decline, vast amounts of paper these firms hold and distribute will be worthless.”
June 25, ’07 Short Term Update: Presented a real time chart of Blackstone Group shares shortly after the debut of its I.P.O. “The immediate after issue selloff in its stock price MAY be telling. To the extent that the price of BX represents the ‘willingness’ of market participants to accept risk, a decline in its share price may represent yet another way to judge the markets’ ‘animal spirits.’ The above chart is not ‘pretty.’”
July 1, ’07 Elliott Wave Financial Forecast: BX was then down 23% from its offering price. “The behavior of Blackstone Shares is probably a good proxy for the prospects of the Private Equity/LBO craze… [It is] yet another sign that the great financial flameout is nigh. The larger liquidity bubble of the past five years appears to be drying up.”
Flash ahead to today, and the setbacks befalling Blackstone and the entire private equity sector stand as a powerful reminder: Someone did see this kind of outcome.
And now, the March 10, 2008 Short Term Update revisits the severely battered Blackstone Group, revealing what the continued drop in the company’s shares says about the overall psychology of investors – and ultimately, how the trend in social mood will shape the overall U.S. economy in the months to come.