James: LPs must pay for quality

President and COO of Blackstone Tony James said LPs should not expect to get a 'Tiffany ring' for the same price as a 'Sears ring' when looking for GP concessions.

Limited partners looking for concessions as a result of mistakes made by GPs should keep in mind the brand name and performance history of their managers, Tony James, president and chief operating officer of The Blackstone Group, said today at the Bloomberg Dealmakers Summit in New York.   
 
“We are still in an industry where somehow, the LPs think ‘I can go buy a Tiffany ring and pay the same price as a Sears ring,’” James said. “At the end of the day investment performance overwhelms the slight differences in economics.”

James admitted that Blackstone has made plenty of mistakes over the years, but cited the firm’s ability to learn from its blunders as a key element of a superior investment culture.

“One of the big advantages I think that any investor has working with a firm that’s been in the business a long time is that we’ve made a lot of mistakes,” he said. “You only learn in investing from your mistakes.”

Tony James

James stated that a dearth of available capital has resulted in power shifting ‘heavily to the LPs’, but that LPs still need to distinguish between quality managers and lesser known managers, even when frustrated over losses.

LPs have been pushing since the financial downturn for “friendlier” terms, including a 100 percent transaction fees share, and ensuring management fees do not become profit centers for firms. Guidelines published last year by the Institutional Limited Partners Association, a trade association for limited partners to private equity funds, called for the transaction fee to go 100 percent toward the “benefit of the fund”.

Last month, Blackstone offered LPs a change in terms for its sixth fund, shifting to an 80/20 transaction fee split in exchange for a slight increase in the management fee, a person with knowledge of the situation told PEO at the time. 
 
The firm, which anticipates closing Fund VI on $13.5 billion, agreed to the term change for the Oregon Investment Council, which committed $200 million in July after negotiating the fee split. Original terms on Fund VI allowed LPs to use 65 percent of the transaction fee to pay down the management fee.