Blackstone confident, sees ‘challenges’ to Saudi-backed infra fund

Two LPs committed to the $40bn vehicle told us they are monitoring the situation involving a journalist's disappearance and the questions surrounding Saudi Arabia's potential involvement.

Blackstone, which admits it may face “near-term challenges” with the $40 billion infrastructure fund it is raising with Saudi Arabia’s sovereign wealth fund, is confident about its long-term strategy, despite rising tensions between the US and the kingdom.

During a third quarter earnings call on Thursday the New York-based firm addressed the disappearance of Jamal Khashoggi – a Saudi Arabian journalist residing in Washington DC and a critic of the Saudi government – and the questions being raised about the alleged involvement of the kingdom’s crown prince, Mohammed bin Salman, in the journalist’s potential murder.

“We’ve been concerned about what we’ve been reading the last couple weeks,” Blackstone chief operating officer Jonathan Gray commented. “That said, we take a long-term approach both to our relationships and to building businesses.”

He added that Blackstone “may get some questions” in the short-term while continuing to raise the fund, but said the firm has full control over how capital is deployed. “We have a hundred percent discretion as to how we invest, when we invest, how we manage the assets, how we sell,” he said.

The firm launched the open-ended Blackstone Infrastructure Partners last year with a $20 billion anchor commitment from Saudi Arabia’s Public Investment Fund, reaching a $5 billion first close in July. Half of that total came from PIF and half from US institutional investors.

Two sources from LPs committed to Blackstone’s fund told sister publication Infrastructure Investor there were internal discussions about the situation and that they were waiting to see what Blackstone’s decision on the matter would be. One source said Blackstone held a call on Tuesday to update investors on the firm’s position. Another said they were monitoring the situation because PIF is “not your typical LP relationship”.

“[Blackstone’s] strategy turns on that dime, the size being critical,” the source said. “We’re monitoring fundraising, we’re monitoring what their ultimate decision is as GP.”

Several high-profile US politicians have called for sanctions if the allegations are true, which could complicate fundraising for Blackstone. So far President Donald Trump has refrained from taking action.

Investors such as pension funds and state endowments have a fiduciary duty to maximise returns for their constituents, and the threat of sanctions could cause concern. Some could also turn away due to social and governance concerns, issues that are becoming increasingly important for some institutional investors.

Despite remaining committed to the infrastructure partnership, Blackstone moved this week to distance itself from the Saudis. Chief executive Stephen Schwarzman announced he would no longer attend an investment forum in Riyadh next week, a decision made along with other top US business leaders including BlackRock’s Larry Fink and JP Morgan’s Jamie Dimon.

Blackstone launched its open-ended infrastructure fund in May 2017 in seeming lockstep with Saudi Arabia. The firm announced the new initiative and PIF’s anchor commitment as Schwarzman travelled with Trump – his first overseas trip as president – and other US business leaders to Riyadh to drum up trade ties between the countries. PIF said it would match dollar-for-dollar the amount of capital Blackstone raises from investors.

According to pension documents, the fund will invest 70 percent of its capital in North American infrastructure and aims to raise $40 billion over the next decade. Terms for the vehicle include a 1 percent management fee based on the net value of invested assets and 0.5 percent on uninvested capital; a two-year, 25 percent first-close fee discount; a 12.5 percent carry and 6 percent hurdle; and a six-year lock-up period.

Blackstone pulled in $24.1 billion over the third quarter and $124.6 billion in the last 12 months, according to the earnings announcement.