Private Equity's Netscape?

Blackstone Group's debut may not look like private equity's Netscape moment at first glance. After all, shares of Stephen Schwarzman's buyout shop popped just 13% on their debut. Shares of the Internet browser that kicked off the dot-com boom in 1995 doubled. Even Fortress Investment Group, Blackstone's smaller rival, surged 68% on its opening day.



But like the Netscape Communications IPO, Blackstone's $7.1 billion share sale, including the chunk sold to China, is the clearest sign yet that investors have suspended their disbelief when judging the private-equity boom. The $39 billion value they have put on Blackstone ignores significant head winds the firm, and the industry as a whole, face. Kohlberg Kravis Roberts & Co.'s willingness to follow Blackstone into the public markets suggests investors will be willing to look at the glass as half full for some time.

Sure, there are differences between a Netscape and a Blackstone. The former was a novelty at the time: the first large Internet company to go public. Shares were hard to value. The firm had no profit and $17 million in revenue. But not unlike the arguments in favor of buying Blackstone, an irresistible growth story was promised to investors. And Netscape's hugely successful IPO opened the flood gates for other dot-com listings. Investors sorely regretted many of those purchases.

Investors are valuing Blackstone at more than 30 times historic pro forma earnings because they believe those earnings aren't only sustainable, but beatable. They haven't factored in threats to the industry's exploitation of tax loopholes, which may account for 20% of profits; the fact that compensation costs at Blackstone will rise over time; nor macroeconomics, such as the effect of rising interest rates on leveraged buyouts. Investors in Netscape did the same thing. It worked for a while. And then it didn't.

Will Ghana Roar?

Some scientists believe that there were tigers in Africa a million years ago. But they died out. The more recent hopes that the continent would generate tiger economies have been equally blighted.

Think of Ghana. When the former Gold Coast gained independence in 1957, its prospects were bright. The new country was rich in cocoa and gold and its population was relatively well-educated. But a long series of coups and persistent corruption dashed those hopes. Ghana is still resource-rich, but it relies on foreign aid for 11% of gross domestic product and 60% of the population still toils away in subsistence agriculture.

An oil discovery and some changed thinking may give Ghana another chance. As John Kufuor, the country's president, put it, "We're going to really zoom, accelerate."

Oil alone certainly won't work miracles, despite a local newspaper's enthusiastic headline: "Thank God, Oil at Last, Thank God." In Nigeria, Angola and Venezuela, huge oil wealth has been disastrous, thwarting the nonoil economy and fertilizing corruption. Fortunately for Ghana, the country's oil revenues are expected to be more moderate, at a little less than the current flow of foreign aid.

A few brave global investors believe that some African countries, including Ghana, are finally learning the lessons of African failure and Asian tiger triumphs. What makes economies successful aren't gifts from foreigners or royalties from oil producers, but bourgeois virtues: education, infrastructure, honest government, middle-class savings, a widespread work ethic, small families and so forth.

The new-found optimism may be a triumph of hope over experience, or a misreading of the effects of the current boom in resource prices. But it does look like a smaller portion of the windfall revenue is being wasted than in the past. That goes along with a growing middle class and more economically responsible government.

Right now, the only tigers in Africa are a few specimens imported from China. But Mr. Kufuor may be right in his hopes for an indigenous species: "You come back in five years, and you'll see that Ghana truly is the African tiger."
Source : http://online.wsj.com