Blackstone Group LP units slid 5.2 percent on Tuesday, closing below the $31 price the private equity giant fetched in its initial public offering last week, as investors fretted the private equity boom may have peaked.
The units closed down $1.69 at $30.75, after earlier falling as low as $30.32. They had risen 13 percent in their market debut on Friday.
Some observers attributed this week's weakness to concerns about Blackstone's lofty valuation and a bill in Congress that would raise the tax rate on the profits of publicly traded private equity firms to 35 percent from 15 percent.
That's a little contagion there, said Elliot Spar, market strategist with Ryan Beck & Co. in New York. There's some people who think the top of the private equity binge was marked when Blackstone became public.
Robert Willens, an accounting and tax analyst at Lehman Brothers in New York, added: It's possible that (investors) are also worried about the possibility that the deal activity may dry up with the increase in interest rates.
In a sign of how deals are getting tougher to complete, Dutch supermarket chain Ahold's U.S. Foodservice has postponed the financing backing its $7.1 billion leveraged buyout by Blackstone rivals Clayton, Dubilier & Rice and Kohlberg, Kravis & Roberts due to weak market conditions, sources told Reuters Loan Pricing Corp. on Tuesday.
Another fear may be that Washington will look for new ways to tap private equity and hedge fund riches, beyond the threat of raising the tax rate.
Blackstone Chief Executive Stephen Schwarzman's personal stake in the firm he co-founded rose by $1 billion to $8.75 billion on Friday, based on the units' closing price of $35.06.
At Tuesday's close, Schwarzman's stake would be worth less than $7.7 billion.
FORTRESS ALSO DECLINES
Shares of New York-based hedge fund Fortress Investment Group LLC also declined, closing down 95 cents or 4.1 percent lower at $22.30, after earlier hitting a record low of $21.90.
The shares have been moving lower since June 15, when the threat of higher taxes first surfaced in Washington. Fortress went public in February at $18.50 a share and closed at $31 on its first day of trading.
There's sort of an unspecified fear that Congress is going to do more to impede (hedge fund and private equity firms) ... that somehow they've got the deal activity in their sights or that they could do something that is far more comprehensive, Willens said. I'm getting a lot of panicky calls about that.
Separately on Tuesday, U.S. Securities and Exchange Commission Chairman Christopher Cox said Blackstone did not have to register as an investment company because it simply manages funds that invest in other companies.
Wall Street analysts had expressed concerns prior to Blackstone's initial public offering last week that the private equity firm may have been on shaky ground in arguing it was not an investment company in its prospectus.
But Cox said the SEC's enforcement division found the company fails tests that would force it to register under the 1940 Investment Company Act.
Francis Gaskins, president of IPO research firm IPOdesktop.com, said a shortage of big deals in the United States, compounded by more and more private equity money chasing fewer and fewer deals, has led to a move by management to cash out. They want to get liquid, he said.
Blackstone trades units, instead of shares, because the firm took part of its private partnership public, a difference from a standard IPO.
(Additional reporting by Ellis Mnyandu and Emily Chasan)