How Wall Street Works & Profiting Of Blackstone’s IPO

By Yaser Anwar, CSC of Equity Investment Ideas

For the past couple of weeks, Blackstone’s IPO has been all the rage. A day doesn’t go by if I don’t read something pertaining to the offering on either of my favorite MSM blogs, Deal Book and FT Alphaville.

My pal Roger Ehrenberg has talked about how buying into the Blackstone IPO is a suckers bet, and I concur with him.

So is there really no way to profit from it? Actually there is, though it requires you to understand how Wall Street works.

Most of you would be cognizant of the quote, "keep your friends close, enemies closer" by Sun Tzu. This quote fits Wall Street precisely. What do I mean?

In an era where bulge bracket firms like Goldman Sachs, Morgan Stanley et al, have raised massive funds to capitalize on record cash on corporate balance sheets and discontent of senior executives due to more stringent regulatory environment [read: Sarbux] aided in part by historically low interest and default rates on a global level, we’re witnessing an increasing convergence of Private Equity, Hedge Funds and Investment Banks.

What does this have to with Blackstone’s IPO? Well, think of this IPO as a way to pay Wall Street back. We’ve noticed that Investment Banks and Private Equity firms have started gunning for the same deals and institutional money for their buyout funds [read: Is Blackstone The New King of Wall Street? and Goldman vs. Blackstone II]

As more buyouts occur, we’re also seeing lots of club deals [read: Going Clubbin’]. The Blackstone IPO is a way of throwing fees at the same bulge brackets it competes with to strengthen their relationship, so in the near future when they’re contemplating another gigantic buyout, they can work as a synergy instead of competing against each other. This doesn’t necessarily mean that Blackstone and its underwriters will be teaming up, but sure gives birth to the possibility and hence makes the relationship more smoother.

This symbiotic relationship is evident between Hedge Funds & Investment Banks. Most Investment Banks now have their own Proprietary Trading desks, yet they act as Prime Brokers to their Hedge Fund clients. The top Hedge Funds generate an exorbitant amount of commissions in order to be privy to the latest upgrades and downgrades and other sell-side services. So you see, they both compete, yet work hand in hand to profit of each other.

Coming back to making money of Blackstone IPO. There is an SEC law the prohibits analyst coverage of new issues for at least thirty days. After these thirty days the analyst community can upgrade and downgrade the issues, this is where you and I can profit. Let’s look at how this scenario could have helped us in Fortress Investment Group’s situation.

FIG came public on Feb 9th. During this time, it fell from $30.87, first day’s closing price, to about 26.7 on March 20th. On March 21st, Wall Street analysts upgraded FIG to "buy" across the board and we saw the stock pop and close at 28.41, a 6% gain. Had an investor known how Wall Street’s analyst community worked, they would have been able to profit handsomely.

I’m quite sure we will see a similar trade opportunity arise for Blackstone. Even if you haven’t read their SEC filings, you know it has lots of potential growth. Blackstone has a IRR of 30%+ and after 30 days of them being public, expect analysts to upgrade ‘BX’ to a "buy".

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