The $3 Billion Birthday Party
Marie Antoinette had her hair parted for parading bejeweled while Paris ran short of bread after a meager harvest.
For Steve Schwarzman, headman at The Blackstone Group, a 60th birthday party was enough to raise eyebrows. This $3 million potlatch may end up costing Schwarzman and Blackstone $3 billion in upcoming market value. As for the two-and-20 crowd, you can add another zero if the Senate Finance Committee gets its way.
In the pre-Black Monday days in October '87, Congress toyed with the concept of disallowing the interest deduction on corporate buyout debt. Wisely, law makers backed off as Wall Street honchos heatedly explained the dire implications for the capitalist system. The market would crash if the cost of doing deals turned prohibitive.
It was OK for Rudy Giuliani to put Mike Milken out of business, but let's not tamper with industrial might built on deals and debt going back to the days of Rockefeller, Carnegie, Frick and Andrew Mellon. J.P. Morgan bought out Carnegie to form U.S. Steel. We all know what Rockefeller did in oil. Mellon created Alcoa and Gulf Oil. Protective tariffs on aluminum shielded Alcoa for decades.
The Blackstone case is different. We are just talking about how to tax the "take" of general partners, their 20% fee on gains from investments. So far, this is calculated at the 15% capital gains rate. The politicos want to change that to the standard corporate rate of 35%.
Hedge funds date back to the early 1950s. The granddaddy was A.W. Jones. Unlike Schwarzman, the general partners kept a very low profile, staffed their company with a handful of good operators and even gave out parcels to outsiders. I ran some money for Jones in the early '60s while working as an analyst at E.F. Hutton. Jones started the 20% performance fee structure; everyone since has followed.
During the '50s and '60s, the endowment funds of Harvard, Princeton and Yale owned bonds, as did most corporate and state pension funds. Stocks were considered too speculative. Today, stocks are considered too stodgy for these institutions. They are slipping huge checks under the doors of dozens of alternative investment houses. Blackstone's assets currently stand at $88 billion, up from $21.7 billion at year-end 2002.
If Congress moves to raise tax rates for alternative asset managers, all it will do is cut their take-home pay packages. This is not tampering with the capitalist system, but rather following the smell of money and getting more for Uncle Sam. At its peak, the excess profits tax ran to 90% for the Robber Barons who didn't complain too vociferously. After all, the capitalized value of Standard Oil was the equivalent of $100 billion today.
Let's face it: Schwarzman et al are changing the face of capitalism not only here but in both hemispheres. The locus of shareholder power is shifting rapidly from entrenched management to activist shareholders. Managers are leaving the corporate world to work for buyout houses. They're following the money trail. The spread between the take-home pay of the buyout crowd and every other category in the business world has widened enormously, not to mention the guys in work boots threatened by globalism's irrepressible march to arbitrage labor to its lowest possible levels.
I'm all for the proposed 35% tax rate. If these guys, dozens of 'em, buy Andy Warhols and Jasper Johns canvasses for $80 million, why not let them build their share of missile silos in the Dakotas? There's over a trillion bucks in hedge fund and buyout house assets, and that number is still growing. We are talking tens of billions in increased tax revenues, prospectively.
The Senate Finance Committee does need some tutoring. Why just tax the houses going public? Why not everybody in the business, and why give them a five-year free ride until 2012? You can see where all this is going. For everyone whose earned income is in the top 1%, or even worse the top .01%, we've seen the lows in tax rates. Schwarzman's crowd has just accelerated the process by its high profits and "let them eat cake" attitude. I'm pissed.
There's no question in my mind that Hillary Clinton is our next president, unless Mayor Bloomberg steps up. Tax rates for everyone on capital gains and dividends are headed back to previous high levels. Don't expect a big break on inheritance taxes, either. A more steeply graduated tax level for the top 1% in the country is in the cards.
The Blackstone underwriting is destined for success. Hedge funds are lined up to buy it for no other reason than to protect the perceived intrinsic value of their own franchises. The going rate on alternative houses is 20 times earnings with a prospective yield of 4%. Blackstone is priced at 30 to meet these metrics.
If the tax rumble becomes reality, at the 35% corporate rate, my earnings estimate of $1.50 a share is cut to $1.15, and next year, to $1.30 from $1.65. Adjusted cash flow of $1.4 billion drops to $1.1 billion this year and returns to $1.4 billion in 2008. Blackstone has sufficient wherewithal to set its dividend at $1.20 a share. I have no idea where the stock will trade on the opening, but a haircut of 10% off the offering price of $30 is fair if the tax rate bump sees daylight.
I stand by AllianceBernstein and Goldman Sachs as good paper, more reasonably priced than Blackstone. Alliance passes through almost all its earnings to shareholders with an estimated yield of 6% next year. Goldie sells at 10 times earnings, with assets under management over $750 billion and counting.
Healthy Habits
For Steve Schwarzman, headman at The Blackstone Group, a 60th birthday party was enough to raise eyebrows. This $3 million potlatch may end up costing Schwarzman and Blackstone $3 billion in upcoming market value. As for the two-and-20 crowd, you can add another zero if the Senate Finance Committee gets its way.
In the pre-Black Monday days in October '87, Congress toyed with the concept of disallowing the interest deduction on corporate buyout debt. Wisely, law makers backed off as Wall Street honchos heatedly explained the dire implications for the capitalist system. The market would crash if the cost of doing deals turned prohibitive.
It was OK for Rudy Giuliani to put Mike Milken out of business, but let's not tamper with industrial might built on deals and debt going back to the days of Rockefeller, Carnegie, Frick and Andrew Mellon. J.P. Morgan bought out Carnegie to form U.S. Steel. We all know what Rockefeller did in oil. Mellon created Alcoa and Gulf Oil. Protective tariffs on aluminum shielded Alcoa for decades.
The Blackstone case is different. We are just talking about how to tax the "take" of general partners, their 20% fee on gains from investments. So far, this is calculated at the 15% capital gains rate. The politicos want to change that to the standard corporate rate of 35%.
Hedge funds date back to the early 1950s. The granddaddy was A.W. Jones. Unlike Schwarzman, the general partners kept a very low profile, staffed their company with a handful of good operators and even gave out parcels to outsiders. I ran some money for Jones in the early '60s while working as an analyst at E.F. Hutton. Jones started the 20% performance fee structure; everyone since has followed.
During the '50s and '60s, the endowment funds of Harvard, Princeton and Yale owned bonds, as did most corporate and state pension funds. Stocks were considered too speculative. Today, stocks are considered too stodgy for these institutions. They are slipping huge checks under the doors of dozens of alternative investment houses. Blackstone's assets currently stand at $88 billion, up from $21.7 billion at year-end 2002.
If Congress moves to raise tax rates for alternative asset managers, all it will do is cut their take-home pay packages. This is not tampering with the capitalist system, but rather following the smell of money and getting more for Uncle Sam. At its peak, the excess profits tax ran to 90% for the Robber Barons who didn't complain too vociferously. After all, the capitalized value of Standard Oil was the equivalent of $100 billion today.
Let's face it: Schwarzman et al are changing the face of capitalism not only here but in both hemispheres. The locus of shareholder power is shifting rapidly from entrenched management to activist shareholders. Managers are leaving the corporate world to work for buyout houses. They're following the money trail. The spread between the take-home pay of the buyout crowd and every other category in the business world has widened enormously, not to mention the guys in work boots threatened by globalism's irrepressible march to arbitrage labor to its lowest possible levels.
I'm all for the proposed 35% tax rate. If these guys, dozens of 'em, buy Andy Warhols and Jasper Johns canvasses for $80 million, why not let them build their share of missile silos in the Dakotas? There's over a trillion bucks in hedge fund and buyout house assets, and that number is still growing. We are talking tens of billions in increased tax revenues, prospectively.
The Senate Finance Committee does need some tutoring. Why just tax the houses going public? Why not everybody in the business, and why give them a five-year free ride until 2012? You can see where all this is going. For everyone whose earned income is in the top 1%, or even worse the top .01%, we've seen the lows in tax rates. Schwarzman's crowd has just accelerated the process by its high profits and "let them eat cake" attitude. I'm pissed.
There's no question in my mind that Hillary Clinton is our next president, unless Mayor Bloomberg steps up. Tax rates for everyone on capital gains and dividends are headed back to previous high levels. Don't expect a big break on inheritance taxes, either. A more steeply graduated tax level for the top 1% in the country is in the cards.
The Blackstone underwriting is destined for success. Hedge funds are lined up to buy it for no other reason than to protect the perceived intrinsic value of their own franchises. The going rate on alternative houses is 20 times earnings with a prospective yield of 4%. Blackstone is priced at 30 to meet these metrics.
If the tax rumble becomes reality, at the 35% corporate rate, my earnings estimate of $1.50 a share is cut to $1.15, and next year, to $1.30 from $1.65. Adjusted cash flow of $1.4 billion drops to $1.1 billion this year and returns to $1.4 billion in 2008. Blackstone has sufficient wherewithal to set its dividend at $1.20 a share. I have no idea where the stock will trade on the opening, but a haircut of 10% off the offering price of $30 is fair if the tax rate bump sees daylight.
I stand by AllianceBernstein and Goldman Sachs as good paper, more reasonably priced than Blackstone. Alliance passes through almost all its earnings to shareholders with an estimated yield of 6% next year. Goldie sells at 10 times earnings, with assets under management over $750 billion and counting.
Healthy Habits
posted by SAKN at 10:52 AM
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