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Blackstone Group: Are Higher Prices for Acquisitions Justified?

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Mar. 29 2018, Updated 7:30 a.m. ET

Why are valuations higher?

A representative of the Blackstone Group (BX) believes that paying higher prices for acquisitions is justified. According to Blackstone’s management, on a global basis, all its businesses are seeing a favorable momentum, which is the main reason for higher valuations. According to Blackstone, private equity firms are shelling out more money for buyout transactions. One of the main reasons for higher prices is the reduction in the US corporate tax rate as a result of the Tax Cuts and Jobs Act. As a result, companies are able to accumulate higher cash flows.

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Blackstone management also stated that another key factor behind rising valuations is technology. According to Blackstone, the operating businesses of buyout firms can become efficient with the help of technology, thus positively impacting its multiples. If technology is being effectively utilized, it could act as a tailwind since it would help reduce costs and thus improve earnings.

Life sciences

Blackstone is planning to invest in the life sciences area, and as a result, it hired Craig Shepherd in its private equity business. He will be responsible for investments in that specific area. Previously, Shepherd was working with DRI Capital. Blackstone is getting favorable views of its life sciences area. The company believes there is a big opportunity there that it still hasn’t tapped.

Blackstone’s total debt-to-enterprise value ratio is 0.25x on an LTM (last-12-month) basis. Its peers KKR & Co. (KKR), CBRE Group (CBG), and Brookfield Asset Management (BAM) have ratios of 0.43x, 0.16x, and 0.48x, respectively, on an LTM basis.

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