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 Dubbed "core" private equity, this vehicle would invest in
slower-growing but safer companies, use less debt in buyouts and
charge investors lower fees than most private equity funds, these
people said. Blackstone is seeking as much as $2 billion apiece from
five to six of its biggest public pension fund and sovereign wealth
fund investors for the strategy, the people said.
Aspects of the strategy, including the exact fees and holding
periods for investments, are still being worked out, these people
said. They added that the idea is still at an exploratory stage and
may not take off.
A Blackstone spokesman declined to comment. The biggest investors in
Blackstone's funds include the California Public Employees'
Retirement System, the New Jersey State Investment Council and China
Investment Corp.
The move underscores how Blackstone is looking to boost its
valuation as a publicly listed company by managing more permanent
capital and further diversifying its model of buying and selling
companies. Blackstone is already the world's largest alternative
asset manager, with $284.4 billion in assets under management as of
the end of September spanning private equity, real estate, credit
and funds of hedge funds.
A higher stock valuation would benefit Blackstone shareholders, of
whom the company's employees form the largest group. Chief Executive
Stephen Schwarzman is the biggest holder by far, owning about a
fifth of the firm. In 2013, Schwarzman collected $352.5 million from
dividends from his Blackstone shares.
The new strategy also would help Blackstone address what has been a
frustration for some buyout firms and a source of envy when they
compare their investment vehicles with Warren Buffett's Berkshire
Hathaway Inc. In this vehicle, Blackstone would not be forced to
sell successful companies too soon because the fund is running out
of time.
Most private equity investors however, also known as limited
partners, prefer the traditional buyouts because they deliver high
annualized returns. The prospect of lower returns may not be an easy
sell.
"The fact that investors will pay lower fees is positive. But the
question is whether the net returns will still be high enough to
justify investing in such a product as opposed to publicly listed
stocks," said Steven Kaplan, a University of Chicago finance
professor whose research focuses on private equity.
In June, at Blackstone's annual shareholder meeting, President Tony
James acknowledged that the core private equity model would have
challenges. Limited partners in its funds would likely say no to the
prospect of a 10 percent to 12 percent return for a high-quality
company when they can get 18 percent to 20 percent for private
equity, James said. But he added that there could be ways around
that.
The "core" model approach has already been applied to some
alternative asset classes. Core real estate, for example, involves
investing in safer, long-lease assets with less debt rather than
riskier fixer-upper properties.
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Blackstone, based in New York, began investing in what it calls
core-plus real estate this year through separately managed investor
accounts before combining them into a co-mingled fund.
Blackstone is embarking on its core private equity initiative also
through separately managed accounts, the people said.
A few firms such as General Atlantic LLC and Golden Gate Capital
have also raised so-called evergreen or perpetual funds to invest in
private equity, but they target the higher returns that Blackstone's
traditional private equity business does.
FIRST PITCH
Blackstone, which does not want to abandon its established private
equity business, has had to look at a differentiated "core" strategy
to avoid conflicts with its traditional private equity funds, the
sources said.
The firm first made its pitch on the new strategy to investors last
summer at its annual limited partner summit in a confidential
presentation, a copy of which was seen by Reuters.
Limited partners were told a 20-year core private equity fund could
deliver 1.8 times the profit on capital invested in succession over
the same period in three conventional private equity funds. The
example assumes a 12 percent internal rate of return for a core
private equity fund and 20 percent IRR for a traditional fund.
This is because only up to two-thirds of the capital committed to a
traditional private equity fund is invested at any one time, limited
partners were told. As against that, Blackstone would invest the
entire capital raised in a core private equity in one-go. The costs
of buying and selling companies also add up over time, according to
the presentation.
The popularity of the strategy may come down to the fees investors
are charged.
While these have not been decided, Blackstone in its limited partner
presentation offered an example of a core fund that took 15 percent
of profits in the form of carried interest, a divergence from the
almost universal 20 percent industry standard in private equity.
(Reporting by Greg Roumeliotis in New York; Editing by Paritosh
Bansal and John Pickering)
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