Saturday 21 April 2018

Blackstone and Pinterest – QE's poster children

James Saft

TWO groups with particular reason to be grateful about the Federal Reserve's never-never taper are the people at Blackstone and Pinterest.

Blackstone, with its pioneering and soon to be AAA-rated securitisation of single-family house rents, and Pinterest, which is valued at $3.8bn (€2.75bn) and has no reported revenues (zero, nada, niente), could both serve as poster children for extraordinary monetary policy. Each, in its own special way, is the beneficiary of the loose conditions which the Federal Reserve sees fit to maintain.

Each too, provides a convenient barometer by which we can observe the effects of Fed policy made manifest in financial markets. In short, this is the kind of stuff that often happens when you have a bubble, but sometimes when you do not. How far it goes and how it ends, I cannot tell you. That you should be watching is absolutely certain.

Pinterest, an internet service which allows users to post pictures and other media, raised $225m last week from a group led by Fidelity Investments. That attached a $3.8bn value on the company, or $158 for each of its 24.9 million users in September, who like to do things like post pictures of dinners they someday hope to make.

The company, which raised $200m in February, plans to use the new funds to expand internationally (pictures of Japanese dinners!) and develop mobile apps (pictures of Japanese dinners you look at while waiting for the bus!).

The company has made the first steps towards turning this into money, announcing in September tentative plans to experiment with promoted pins (pictures of Japanese dinners featuring pineapple slices paid for by Dole!)

Remember, too, that the investors in the latest round didn't plop their money down hoping to cash out with a small gain. More likely they are hoping for a very healthy multiple of $3.8bn as the final IPO price. So should we be concerned about a company with zero reported revenue going up in value by 52pc in eight months?

For one thing, a recent Reuters and Ipsos survey found 26pc of the 807 people polled who had signed up for Pinterest said they did not use the service any more and 9pc of people who signed up have since shut down their accounts.

But public markets are keen, with Twitter planning to go public next month. A September survey of Silicon Valley venture capitalists found confidence to be at a six-year high, with particular enthusiasm about the environment for public offerings.

Hmm, where were we six years ago? Oh yes, at the beginning of a financial crisis which only ended due to extraordinary efforts by government and by central banks. Pinterest may turn into a money-making machine, and well reward its investors, but there can be no doubt that Fed policies aimed at encouraging risk-taking in financial markets are at work here.

"Ground-breaking securitisation." There was a time when I actually thought I'd never hear those three little words again. But no. Now we have private equity group Blackstone and its planned $300-$500m bond backed by rents flowing from homes it bought mainly out of foreclosure.

DISASTER

A bit like Pinterest, the whole enterprise is either pure genius or just another financial disaster waiting to happen.

Having spent upwards of $6bn buying up foreclosed houses, Blackstone now wishes to get some of its money back by selling the right to the stream of income to investors hungry for that extra bit of yield.

According to the 'Financial Times', the deal will get a credit rating from agencies including Kroll, Morningstar and Moody's and will get at least one AAA rating.

Now of course, structured credit ratings are different from sovereign ratings, but there is an irony here that the US doesn't even have AAA ratings from all its raters. And while I am sure this will have lots of bells and whistles to justify the top rating, the US has a printing press with which it can satisfy its creditors at zero cost.

To be sure, it is impossible to judge the offering without knowing the particulars, which are not yet public.

That said, this is a complex business, really a new one on this scale, and the securitisation will include many risks for which we don't have very good data.

Again, the very fact that this is happening is at least in part due to very loose monetary policy which has made many investors both highly confident and really desperate for that extra bit of yield.

Triumph, disaster or somewhere in between, both of these deals will be fascinating to watch. (Reuters)

Irish Independent

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