What’s ailing Blackstone?

July 20, 2007, 11:42 PM UTC

Shares of Blackstone (BX), the king of Wall Street’s kingdom, can now fairly be described as being in free fall. At $26, they are off 16% from their $31 offering price. The stock is down 5% today alone. (The Chinese government is under water too. Ouch.) Why? Let’s just say it’s got nothing to do with Google’s (GOOG) earnings miss. No, Blackstone’s hurting for plenty of other reasons, like ongoing fears about the cycle turning in the private-equity business.

There’s a concrete indicator as well. Last night the chip company Freescale Semiconductor reported a horrendous quarter. Sales were down 14% from the year-earlier quarter, primarily because of weakness at Freescale’s largest customer, Motorola (MOT). Operating earnings are way down.

All of this has to be more than a little distressing to Blackstone, which bought Freescale in December after beating out a group led by KKR in a bidding war. As I’ve written before, it’s a near certainty that Freescale is worth far less today than what Blackstone and its partners paid for it eight months ago. Motorola’s shares are off 18% since Blackstone bought Freescale.

The private equity guys aren’t perfect. They were able to do extensive due diligence on Freescale and they still missed that Motorola’s woes were going to hurt it. Ordinarily, Blackstone would have plenty of time to make things right at Freesscale and for its portfolio. But now Blackstone has its own public-market investors to deal with. They get to vote every day, as opposed to institutional investors in Blackstone’s funds, which are committed for years. Retail investors seem to be voting with their feet for now.