Schwarzman: Endowments are out of PE

Blackstone’s chief Steve Schwarzman said endowments are 'out of business' in terms of committing to private equity.

Endowments in the US are “basically out of business” in terms of making allocations to private equity funds, and state pensions are cutting – sometimes dramatically – down their manager relationships.

Steve Schwarzman, head of The Blackstone Group, gave an analysis of the private equity fund-raising environment during the firm’s third quarter earnings call last week.

Fundraising remains fairly stagnant, he said, but most institutional investors are looking to stick with the asset class.

“We’ve had talks with some of these investors and they tell us they really want to go from 120 relationships to 30,” Schwarzman said about US public pensions. “There will be a lot of ‘left-outs’ in this area.” About 50 percent of investors in Blackstone funds are state pensions, he said.

In some recent examples, Princeton University announced in October it was cutting in half the amount of private equity managers with which it works. Harvard University, another long-time private equity LP, announced in September it was cutting down the ranks of its GPs.

But Princeton’s chief investment officer Andrew Golden told PEO recently the endowment is not looking to alter its 23 percent allocation to the asset class – meaning Princeton will be giving larger commitments to fewer GPs.

Other LP sources disagreed with Schwarzman’s characterisation of endowments being out of the market. One LP source qualified the statement by saying endowments have been less actively recently, but aren’t out of the asset class for good.

Firms that are able to raise money in this environment face “a little fee pressure … usually on transaction fees, not so much on management fees or carry”, Schwarzman said during the call.

In Europe, institutions are looking to make commitments to funds, but at much smaller levels than LPs in the US have made in the past, he said. “The Europeans are more cautious as a rule,” he said.

Middle Eastern wealthy families have significantly cut back from making commitments in part because investors lost so much in real estate bets that went bad, Schwarzman said.

“People really levered up, equity got crushed and that led to conservatism,” Schwarzman said. The wealthy families have been focusing on investing back into their home economies, he said.

Blackstone’s sixth buyout fund is expected to close this quarter above $13.5 billion, making it the largest fund raised in at least the past two years. The fund has been in the market since early 2008, and the firm has extended fundraising to allow some last minute LPs to make commitments.

In recent months, state pensions in Oregon and New York have signed on to the fund with big commitments, $200 million and $300 million, respectively.