The Blackstone Group, this year’s number seven in the PEI300, is distancing itself from the world of large buyouts as it seeks to garner commitments for its sixth buyout fund.
“Large buyouts, which get a lot of the press, is not a big portion of what we do,” Tony James, Blackstone president and chief executive officer, said in April. “We will do them on occasion and the returns we get from those investments are just as high as what we do for anything else. Most of our money, 75 percent of our money goes into growth investing. We like to build companies, that’s what we’re known for.”
James was speaking at a meeting at the San Diego County Employees Retirement Association, where he was soliciting a commitment from the pension for Fund VI. The firm has lowered its target for the fund from an initial amount of $20 billion to an expected total of $12.5 billion.
James gave a bullish account of the firm’s performance to date, noting the worst scenario LPs should expect from a Blackstone fund would be to receive $1.50 back for every $1 invested. “We’ve never had a fund that bad,” he noted. “The worst we’ve ever done is 2:1, even in this recent meltdown.” He said LPs should anticipate a return of 2.5 times their investment, with “the best” they can expect being a 3.5x multiple.
James said his firm had been “particularly good” at reading the economic cycle: “We try to pull back when others get all frenzied and start doing wild things,” he told the pension, adding: “In late 2006 the world seemed so good … I read an article that said for the first time in history, the stock markets in every emerging market in the world made a new high in one week, and I thought, this has got to be come sort of sell signal.
“Even though there were no problems, we got all our businesses together we looked at all the things that were going on in subprime and real estate and as a firm, we decided that indeed it was a peak, so we pulled back in late 2006. We pulled back significantly then; we essentially pulled out of the market and stayed out of the market until things started cratering.”
His presentation also broached the subject of investment banking fees, of which Blackstone is “one of the largest payers” in the world. “We’re not particularly proud of that,” he said. “We very actively manage that fee stream to reward and incentivize financial intermediaries to give us proprietary deal flow.”