Adventures in Money Making

I was talking to another investor about the BlackStone IPO. He was planning on investing and wanted to know my opinion. My only opinion is that the ticker should have been BS instead of BX!

Why is that? Because its a fraud. The only reason Stephen Schwarzman is taking the company public is because the market is willing to pay much more than the company is worth. The company doesn't make any nor does it really provide any services. Here's an interesting story about what these private-equity firms really do.

The "New Capitalism" is not only more global than the older form, it is also more focused on finance. Imagine a man who makes his living digging ditches. He may hire himself out at a daily rate of, say, $25. The old capitalists would have paid no attention to him - he is just one of millions of small entrepreneurs getting by in life.

But today's financial hustlers will spot the opportunity. Let's take him public, they will say. We'll raise his daily rate to $30...pay him his $25...and the rest will be our "profit." We'll sell shares to the public at a P/E of 20...let's see, 20 x $5 x 250 days per year = $25,000. All of a sudden, the ditch digger has a capital value of $25,000. Then, they borrow $20,000 from a hedge fund...and pay it to themselves for structuring the deal. Now, the hustler has $20,000 in his pocket, the hedge fund has a high-yield bond worth $20,000; the shareholders have $25,000 worth of stock; and the poor man is still digging his ditches.

Then, an even more ambitious wheeler-dealer will come along and decide to "roll up" the whole industry - bringing the ditch diggers together into a multi-national consortium. Now they can all do cross-border transactions...including derivatives. And now ditch-digging is a major business, suitable for large investors...with more investment coverage and a higher P/E ratio. Soon all the world's banks, pension funds, insurance companies, and hedge funds have some of the ditch digging paper - debt or equity - and billions in fees and commissions have been squeezed out of
ditches by the financial industry.

That, patient reader, is the way (the world-over) that industries and assets are now being bought, sold, refinanced, leveraged, re-jigged and resold. In the old days, companies went to investors or to banks for capital and cultivated a relationship with them that was long and fruitful. Now, it's all wham-bam-thank-you-ma'am capitalism. Inquiring capitalists now only want to know one thing - how fast can we do this deal? How many points can we get out of it and how much leverage can we get? And whom can we dump it on, when we're done?

Labels: Economy, Rants