Mon, Oct 13, 2014 page15

• Blackstone shuns norms, spins off advisory group

  CONFLICTS OF INTEREST: The private equity giant said that the advisory business was being hindered by investment operations, leading to the decision to break away

  • NY Times News Service
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  For decades, it has been a deeply held belief among many of Wall Street’s giants that a multiplicity of business lines is superior to a more streamlined model.

  However, Blackstone Group LP, the world’s largest private equity firm, has cast a vote against conventional wisdom, on Friday saying that it would spin off its divisions that provide advice on corporate transactions.

  Blackstone acknowledged that the advisory division — its oldest line of business — was being hampered by potential conflicts of interest arising from being housed under the same roof as a giant investing arm.

  To lead the newly independent firm, it attracted a prominent investment banker, Paul Taubman, who has been tackling large deals on his own since leaving Morgan Stanley two years ago.

  For Blackstone, which was founded by Stephen Schwarzman and Peter Peterson in 1985 as an advisory boutique, the decision to break from the advisory business was challenging.

  The business to be spun off includes a mergers and acquisitions practice, a restructuring services team and a group called Park Hill that helps private equity firms and hedge funds raise capital.

  In a voice message to employees on Friday morning, Blackstone chief executive and chairman Schwarzman said that he pursued the move “not without mixed emotions.”

  However, the firm, which today manages almost US$300 billion in assets across private equity, real estate and other investment strategies, ultimately recognized that the advisory business was being stymied by the investing operations.

  When Lehman Brothers Holdings Inc went bankrupt, for example, Blackstone’s restructuring group was prevented from pursuing that opportunity because its real-estate investing arm wanted the option of buying assets from the Lehman estate, said Joan Solotar, Blackstone’s head of external relations and strategy.

  In addition, rival private equity firms would not hire Blackstone’s bankers for competitive reasons, she said.

  “The number of transactions that the advisory folks were told to stand down on has grown exponentially,” Solotar said.

  “That was becoming increasingly just a constraint on the business,” she said.

  The restructuring group is ranked first worldwide this year in terms of announced business, with US$32.4 billion of deals through Friday, according to Thomson Reuters data.

  The merger advisory group has a much lower ranking, in 89th place globally.

  However, combined, the advisory businesses generated about US$380 million of revenue in the 12 months through June 30, comparable to some of Wall Street’s independent investment banks.

  Blackstone plans to acquire PJT Partners, the fledgling firm created by Taubman that includes about a dozen partners, and merge it with the advisory business while spinning off the combined entity.

  When the deal is completed next year, its shareholders are scheduled to initially own 65 percent of the new company, while the advisory employees, along with Taubman and his partners, plan to own the balance, Blackstone said.
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