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Economics 101: Supply And Demand

>> Monday, December 30, 2013

Recent news of GIC acquiring Blackstone's interest in London's Broadgate piqued my interest. It is reported that GIC paid around $1.7 billion pounds (approximately S$3.5 billion) for a 50% stake in the office and retail estate. Blackstone originally purchased that in 2009 for $77 million pounds. Yes, one is a “B” and the other an “M”, which works out to be over 2000% profit in 4 years.

(Update on 31 Dec: The $77 million pounds purchase quoted was based on reports from The Daily Telegraph. However, after looking at other sources, the purchase price was actually $1 billion. $77 million was raised through equity funding, the remainder of 900+ million through debt funding. So, the profit works out to much less astonishing at less than 70% over 4 years taking into account debt interest to be paid. Special thanks to the anonymous comment.)

Who is Blackstone? According to Wikipedia - The Blackstone Group L.P. is an American multinational private equity, investment banking, alternative asset management and financial services corporation based in New York City.

Ok, is there a point?

This just led me to recall about stock prices – supply and demand on the exchange. The deal involved 2 supposedly experts in the field of investments. Then, why does GIC feel that the price is fair to buy? And why does Blackstone feel that price is fair to sell?

For every transaction on the exchange, there must be a buyer and a seller. At every price transacted, someone feels it is high enough to sell and someone feels it is low enough to buy. Beauty is in the eyes of the beholder.

As a retail investor, am I wiser than the financial PhDs in Mr Market to not be fooled into buying what they are desperately trying to off load or accurate in predicting the best Market timings?

This reminds me of Mr Ben Graham’s three key words of investment – “Margin Of Safety”. Simply put, Graham’s margin of safety is the difference between price and intrinsic value. In theory, the further the price is below its intrinsic value, the greater the margin of safety against future uncertainty and the greater the resiliency to downturns.

Did GIC snap up a good bargain?

Time will tell, and, this too shall pass.

2 comments:

Anonymous December 31, 2013 at 9:12 AM  

Hi, I think there's an error in the amount that Blackstone paid for Broadgate in 2009.

In the 2010 Annual Report by British Land who sold the 50% stake to Blackstone, it was stated that the amount received was 1.066B pound.
http://www.britishland.com/~/media/Files/B/British-Land/downloads/investor-downloads/pdf_60.pdf

Lau December 31, 2013 at 10:27 AM  

Thanks. Updated.

Source:
http://www.telegraph.co.uk/finance/newsbysector/constructionandproperty/10253588/Blackstone-to-make-1.6bn-profit-on-Broadgate-office-sale.html

And

http://www.cityam.com/article/blackstone-set-cash-broadgate-sale

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