Last year, I wrote about the IPO of the private equity group Blackstone. Lots of people were excited. Private equity going public! What a neat concept! Considering their past success, there’s no doubt they’re going to go gangbusters when they go public!
Well, the stock has not done so well; it’s lost over 50% since its IPO. Unfortunately, this performance is typical of most IPOs, especially at the height of bull markets.
Benjamin Graham describes the IPO in relation to the market cycle thusly: First, there is the mid-bull market where IPOs are attractively-priced and where people have a decent chance of making money. Then as the market rises, so does the IPO frequency. But with the increase in frequency of IPOs there is a corresponding decline in quality. Graham says a market turning point can be seen when the new stock of small, unproven companies is being offered at higher valuations than many medium, well-established companies. Though Blackstone at the time of its IPO could not be described as small or unproven, I think its fair to say that it was over-valued.
Furthermore, Graham says the result of such an influx of poorly-valued stock will be price collapse and therefore an investor must resist IPOs during bull markets. However, Graham does say that these new issues may prove excellent buys — albeit “a few years later, when nobody wants them and they can be had at a small fraction of their true worth.”
If you’re interested in an account of Blackstone’s recent history and the downward trend of its stock, take a look at Blackstoned.
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