James: Deals abound in risky Europe

Blackstone’s president Tony James gave a speech Thursday, touching on issues including public pensions' need for private equity, GP-LP relationships and the US presidential election.

Amid the market chaos in Europe, The Blackstone Group has been active buying companies, according to the firm’s president Tony James.

The deal activity, which included the buyouts of several German companies, including clothing brand Jack Wolfskin and Leica Camera and UK-based Tangerine Confectionery, could lead to some fantastic returns, but could also turn ugly depending on the outcome of the macro-situation in the region, James said. For example, the firm’s investments in Germany could be hammered by a German exit of the euro, he said.

The choice to go into uncertain markets some other firms have abandoned takes time and “foolhardiness”, James joked, adding: “we like to think of it as courage”.

James gave a wide-ranging and occasionally humorous talk Thursday at Youth INC’s annual State of Market conference about the global financial situation and the evolution of the private equity industry. He talked about the days when the business was “much easier” compared to today’s market teeming with rival firms competing for deals and limited partners fighting for lower fees.

“LPs pay less fees, they give you less money, they take more time and they want more free co-invest,” James said, adding with a laugh: “LPs are beating us up on fees, and our costs are going up … so LPs should be much more generous with us.”

There is no way the pension system can be solvent without private equity.

Tony James

Fundraising has become much harder, with LPs focusing on top quartile players and forming strategic relationships with their favourite managers and trimming down the size of their private equity portfolios, James said.

To adapt to the tougher environment, Blackstone like other firms has broadened its focus, both in terms of strategies and geographies, James said. However, a broadening of focus, especially in terms of geographies, also means spending more money on offices and recruiting talent.

Private equity is a risky business, and occasionally investments will go bad, James said. However, the perception that firms simply load up companies with debt, strip them of assets and sell them is inaccurate, because that strategy doesn’t work. No one would want to buy a company that’s been picked clean of its choicest assets, he said.

Sometimes private equity deals do involve layoffs in the early days of the investment, to help “re-orient” the company and get it on a track for growth. Successful investments ultimately will result in bigger, healthier companies with more jobs, he said.

The headline negativity around the asset class stemming from the US presidential election, and former Bain Capital chief Mitt Romney’s candidacy, does have an effect on LPs, James said. Public pensions are one of the major backers of the firm, and the pension systems’ boards are run by former teachers, police, firefighters and state workers who may not quite understand how the industry works. Negative campaign advertising, therefore, can work to build a bad perception of private equity in the minds of LPs, he said.

Industry professionals should work to tell their side of the story, James said.

Tony James

“The industry is learning … if you hide, the media will define you.”

He went on to note, however, that LPs were not likely to shun the asset class because they need private equity to deliver the returns that will ultimately allow them to meet their benificiaries' obligations.

“There is no way the pension system can be solvent without private equity … they cannot fund themselves,” James said.

The 5th annual State of the Market conference was hosted by Youth INC, a non-profit that has raised $40 million to help as-risk youths.