Buyout and hedge fund stocks still suffering

By Megan Davies

NEW YORK, June 13 (Reuters) - The party was over before it really began for investors who bought into initial public offerings of private equity and hedge fund firms.

When companies like Blackstone Group (BX.N: Quote, Profile, Research, Stock Buzz), Och-Ziff Capital Management Group (OZM.N: Quote, Profile, Research, Stock Buzz) and Fortress Investment Corp (FIG.N: Quote, Profile, Research, Stock Buzz) debuted last year, the environment to do deals was vastly different.

Debt available to finance buyouts was cheap, allowing huge leveraged deals to be inked and fueling investor demand to get in on a piece of the action.

But shares in the few companies that went public have suffered as the credit crunch changed the landscape for deals, shrinking the ability for buyout firms to do their bread-and-butter business of leveraged buyouts. That's put the brakes on rival firms trying to debut.

"The party is over for them -- flat out over," said Francis Gaskins, president of IPOdesktop.com. "There was a relatively short-term opportunity for them to raise money, and that's gone."

It is nearly a year's anniversary for Blackstone, which debuted on the New York Stock Exchange June 22 in an offering seven times oversubscribed. On its first day of trading, shares rose 13 percent from their $31 debut price. Fast forward a year and the shares are nearly half price at $17.88.

Blackstone CEO Stephen Schwarzman said in an interview last week with the Financial Times that with hindsight the firm had ended up selling their shares at a market peak.

"No one likes to sell securities a week or two before a market peak because it's not a good result for the buyers of those securities," he said.

Of the other firms that went public last year, Fortress led the charge, soaring 89 percent to $35 in its February 2007 debut after pricing at $18.50 per share. Its shares closed on Friday at $14.07. Hedge fund Och-Ziff priced at $32 apiece in November. It closed on Friday at $21.12.

The credit crunch has put the brakes on rival firms trying to debut, such as buyout firm Kohlberg Kravis Roberts & Co, which "missed the window by about four months," said Gaskins. KKR filed for an IPO in July but has not pursued it or withdrawn its registration.

Gaskins said it was hard to predict when the market will improve. "The fundamental trends are going against private equity and it's harder for them to make money," he said.

Generally, though, private equity firms aren't ruling out the possibility of going public in the future.

Providence Equity Partners Chief Executive Jonathan Nelson, when asked earlier this week if he would consider an IPO of the Rhode Island-based buyout firm, said that if it would bring a strategic advantage, he would consider it.

Apollo Global Management, the buyout firm run by billionaire investor Leon Black, is moving to list on the New York Stock Exchange. It said in April it planned to sell 29.8 million shares. Apollo's shares were previously traded on a private exchange.

For investors in the original IPOs it could be a long wait for the LBO market to improve. While leverage has been coming slowly back and M&A has been increasing, most predict it will be a long haul before significant deals are done.

Banks' ability to syndicate loans is key to any restarting in large buyout activity, which virtually collapsed in the wake of the Wall Street credit crisis of the past year.

David Rubenstein, co-founder of the $81 billion Carlyle Group, said last week it would be "a number of years" for institutional buyers to return to the market for collateralized debt obligations and other vehicles used to finance deals.

For some, the dip could be seen as a buying opportunity. Deutsche Bank analyst Matthew Fischer has a "buy" rating on Blackstone and a share target of $24, noting that Blackstone "pays a $1.20 dividend while you wait" for an improvement in the stock. (Reporting by Megan Davies, editing by Mark Porter)