Blackstone Group has not been one to cut off a marathon Q&A session on its quarterly investor calls. Today’s was no exception, as it ran well past the time I needed to hop off for the American Capital call. Up until that point I waded through the sea of extremely detailed questions and answers (and lost a set of headphones to a cup of coffee in the process), all in the name of bringing you the most quotable moments from Steve, Tony, and the gang.
Best Quote goes to COO Tony James, who said, “Portfolio companies are humans. Well, they’re run by humans at least,” in response to a question about performance. Does this mean buyout pros really do look at their portfolios as their children? That’s bad news for anyone who subscribes to the mantra “No one wants to call the baby ugly.”
James also said, in relation to portfolio company performance, “The rate of decline seems to be abating but decline itself is still going on. I don’t consider that green shoots, I consider that the continuation of winter.”
Regarding to the New York Scandal and its subsequent ban on placement agents (as it relates to Blackstone’s placement agent business, Park Hill Group), CEO Steven Schwarzman has this to say:
‘Park Hill and Blackstone could not be more different than the fixers and political (somethings) that the New York attorney general has accused. … From the point of view of a public pension plan, a placement agent performs a valuable service.”
He continued, “Large, well-known funds need placement agents less. Small-sized funds, women-controlled funds, minority funds and start-up funds need them more. Banning placement agents entirely hurts all of them. We are hopeful this area of problems will be resolved with extensive disclosures and licensing requirements, and we believe it would be a good thing for the industry, for the pension funds and for the people who want to have money raised. The State of Massachusetts echoed that sentiment today.” This is a reference to comments from Michael Travaglini, the director of Massachusetts pension fund program, who on Monday called the New York ban “misguided.”
James and Schwarzman explained Blackstone’s about-face on PPIP and other government programs, in which the firm touted its excitement about the programs last quarter and now seemed to have changed its tune. James said, “We didn’t apply in the first round (of PPIP applications). We’ll have a look and see what develops. We’re not sure about how active it will be, how expensive it will be to look at the asset pools that are for sale and how the market will price it.”
Later, Schwarzman said Blackstone might be more interested in distressed bank assets outside of the PPIP program, and the firm may even use TALF money. He said, “We don’t have some religious belief about this area, we’re not rigid about it. We may come back and look at it once it involves loans.”
Blackstone’s ability to buy operating company debt, Schwarzman said “I wish we had bought back more because those markets have really strengthened.”
Regarding, the firm’s pace of capital deployment, Schwarzman said it’s slow. “We’re much better off putting money out after we see a turn in the market than trying to pick bottoms. Picking bottoms on leverage is a very unhappy business strategy,” he said. “When we miss a run its like life in slow motion.”
James added that the firm’s buyout funds estimate to deploy around $3 billion in capital and, its credit funds will deploy between $3 billion and $5 billion, depending on fundraising.
Regarding strategic acquisitions of other asset managers, James said yes, yes yes. “There are a lot of companies on the block that are struggling. They got started up with the idea that the trees would grow to the sky, and got partway there with heavy overheard, with their assets being marked down by redemptions or market moves are now struggling for profitability. We can take those on and they’re very profitable additions,” he said. “You‘ll see us looking hard at consolidating acquisitions.” One area Schwarzman mentioned of interest for add-on deals is leveraged bank loan managers.
Regarding the fundraising environment, Schwarzman said “The tone is not a happy one for sure.” As Dan pointed out, the firm hasn’t held any big closes on its main buyout fund since last quarter.