Steven Schwarzman, The Blackstone Group’s chairman and chief executive, has warned banning all placement agents in order to root out a few “bad apples” would be like banning the sport of baseball because a few players used steroids.
“I am well aware that there have been a few bad apples, particularly in New York State and New Mexico, which have brought the placement agent issue to the fore,” he wrote in a letter to the Securities and Exchange Commission. “No one has any sympathy with unlicensed influence-peddling political fixers. They should be eliminated for the good of everyone in the business. But there are ways of doing this without banning an entire industry.”
Without the assistance of CS First Boston and Bankers Trust, I can assure you that our fundraising efforts for our first private equity fund would have utterly failed.
Schwarzman’s opinion is in line with many other letters the SEC has received from private equity industry figures as the regulator considers implementation of a rule that would prohibit placement agents from interacting with public pensions. The proposed rule is fallout from investigations by the SEC and the New York District Attorney into a pay-to-play scandal involving “fixers”.
Schwarzman said he was not writing on behalf of Blackstone’s placement affiliate Park Hill Group, but rather to illustrate the crucial role placement agents play in helping new firms get off the ground.
In the letter, he also detailed the difficulties he and co-founder Pete Peterson had in raising capital on their own. “Bear in mind that we were not neophytes in the financial world. Pete had been chairman and CEO of Lehman Brothers and Secretary of Commerce in the Nixon Administration and I had headed the mergers and acquisitions department at Lehman Brothers,” he said.
“Without the assistance of CS First Boston and Bankers Trust, I can assure you that our fundraising efforts for our first private equity fund would have utterly failed, Blackstone would have been a very different firm today and may not even have survived at all.”
Schwarzman also highlighted how a placement agent was able to help the firm become one of the first private equity managers backed by the California Public Employees’ Retirement System. CalPERS had initially turned down Blackstone’s invitation to invest in its second fund, but a placement agent subsequently arranged a meeting with the pension’s chairman and trustees that resulted in reversing the decision.
CalPERS eventually committed $75 million to Blackstone Capital Partners II, which according to pension documents achieved a 37.4 percent net IRR and 2.2x investment multiple.
“The indirect beneficiaries are the police, fire fighters, teachers, and state and local municipal workers whose pensions are now more secure given the high returns that we have provided over the years,” Schwarzman said. “None of these favourable results for these constituencies involved would have been achieved without the initial use of placement agents by us in our first two funds.”
Nearly 40 percent of all Blackstone’s capital, or $39 for every $100 committed, comes from state and local pension funds, he added.
The full text of Schwarzman's letter is available here.