Michael Kinsley weighs in on the Blackstone IPO in the new issue of Time, and he does it very entertainingly. It’s basically a much-improved redo of a Slate column he wrote in November that I took to task in this here blog.
This time I don’t really see anything to take Kinsley to task over. I’ll leave that to the perpetually aggrieved commenters over on Swampland; oh, and I’m sure if Ms. Private reads it, the steam will start coming out of her ears. But the column does provide an excellent opportunity to move this Blackstone IPO discussion toward something that actually matters to most of us. Writes Kinsley:
When a private-equity firm goes in and buys, say, a washing-machine company, it rarely does anything to improve the washing machines. Instead it concentrates on restructuring the company–selling off the dryer division, perhaps. Or it doesn’t even get its hands dirty to this extent but just fiddles with the finances. I’m not knocking it. It seems to work. Shares in the company are suddenly worth double. But most of that increase in value has gone to the private-equity firm and its investors, not to the folks who have bought stocks in the ordinary way. They are the ones who sold the company at $5 billion and bought it back at $10 billion.
Why can’t the stock market deliver that $10 billion in value? Why does it take Schwarzman and crew to squeeze it out (for themselves)? Some say it’s the short-term perspective of the investing public. Some say it’s excessive regulation, most of which doesn’t apply to private-equity investments. Whatever the explanation, the billions earned by private-equity operations aren’t “created,” as the whimsical conceit of Wall Street troubadours would have it. These billions are a toll charge collected from ordinary investors.
The investors in Blackstone’s private equity funds, who do benefit from all this “abracadabra,” as Kinsley calls it, are for the most part institutions: college endowments, foundations, and pension funds. Pension funds at least are investing on behalf of ordinary people. Yet for the past 30 years this country has been moving its private sector workforce out of pension funds and into self-directed plans like 401(k)s.
I don’t know of a whole lot of 401(k)s with a Blackstone private equity or real estate fund as one of the options. Do you? This is one reason why, as pension consultant Keith Ambachtsheer‘s CEM Benchmarking has documented, defined-contribution plans (like 401ks) underperformed defined-benefit plans (pension funds) by 1.8% annually over the eight-year period ending in December 2005.
Now I happen to be of the opinion that the corporate pension system that arose in the U.S. after World War II is unsustainable and unfair to lots of workers. But switching to an “ownership society” where everybody is responsible for his own retirement planning would seem to mean, among many other things, that the abracadabra of Blackstone and other private equity funds, venture capital firms and hedge funds will never again be available to regular folks.
Unless, that is, Blackstone’s stock turns out to be a good investment. Kinsley is dismissive of this possibility:
The consensus in the business world seems to be that Schwarzman and his colleagues may be selling full-price tickets to a ball game in the ninth inning, as the stock market fizzles out. These private-equity types are not in the habit of selling at the bottom.
Short-term, I’d say he’s right. The Goldman Sachs IPO, which bears a lot of similarities to Blackstone’s, happened in 1999, not long before the market tanked. But since then Goldman’s stock price has tripled. And mutual fund company Eaton Vance was the best performing stock of the quarter century starting in 1980. Investors in Eaton Vance stock did dramatically better than investors in its mutual funds.
So maybe Blackstone’s stock will be okay. But I’m nonetheless coming around to the idea that entirely removing the potential abracadabra of private equity from the retirement portfolios of ordinary Americans is a really bad idea. So how do we get it back in there?