From aiCIO's February issue: Tim Walsh, Blackstone, and the fee revolution. Leanna Orr reports.
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Stephen Schwarzman met with the head of the World Bank on Wednesday; Thursday morning, he’s speaking to a mostly empty meeting hall in Trenton, New Jersey, trying to make the audience like him. “Contrary to what you might read in the press, private equity creates jobs,” Schwarzman says to the 30 or so union members and state employees scattered in front of him. “Blackstone paid $74 million in taxes to New Jersey last year, and we see some really interesting opportunities for us here.” During his presentation, he rattles off Blackstone’s commitments to New Jersey—26 portfolio companies, three headquarters, and thousands of employees—but his investments are not what brought him to Trenton. Schwarzman is there for his investors. “Blackstone is the world’s largest manager of alternative investments,” he says by way introduction, “and the New Jersey Division of Investment is one of our most important clients.”
Important, sure, but also one of the lowest paying. New Jersey’s $73.7 billion state pension fund is—thanks to a cocktail of strategy, bold leadership, luck, and innovation—getting more for its asset management money than almost any other public pension fund in America.
Schwarzman spent half an hour or so at the podium, giving his take on the state and future of the global economy, and describing Blackstone’s place in it. “Europe has got a variety of structural flaws, although it doesn’t look like a Eurozone collapse will be the case,” he said. “Still, it’s tough to get loans, which means opportunity for people like us who have money from nice people like you.” A lot of money, to be precise: In 2011 alone, the New Jersey Division of Investment (NJDOI) committed $2.4 billion to the private equity firm Schwarzman founded, bringing the total investment well north of $3 billion. As he spoke to the audience—some in their matching purple union T-shirts, and others who looked like they shared a Madison Avenue tailor with him—Schwarzman couldn’t help but give a sense of his own place in the world financial market, as well. “I was with somebody yesterday who is the head of the World Bank,” he mentioned casually, as the source of a certain chart.
After the presentation, he stayed on to answer questions from the State Investment Council, looking much less aware of the time than his well-dressed staffer, who began pacing in the back. The topic of fees came up, as it does predictably at council meetings, according to the chairman.
“There has been a trend to pressure on fees,” Schwarzman acknowledged. “I think there has also been a re-looking across the pension fund industry and asset management as to who exactly is getting money to manage. It’s good to save money on fees, but if you give money to the wrong people, you will destroy those savings many times over. On some of our products there’s fee pressure, on others there isn’t. Markets have been unfavorable, so it’s rare I go into meetings and see any happy people. Institutional investors who have underperformed their needs—just because markets haven’t worked—are looking for ways to economize. It’s not unexpected.” Schwarzman shakes his head at investors who drop Blackstone over fees, and switch to bargain managers with “you’ve got to be kidding me” performance records. “And we say, ‘good luck!’”
NJDOI is fixated on fees, but hardly about to jump ship for a cheaper fare. As Schwarzman semi-joked while going over the Blackstone-NJDOI deal, “You all have negotiated too good a deal with us.”
New Jersey’s state pension fund has been an investor in Blackstone since 2005, the first year it had an alternatives program. In fact, an allocation to Blackstone V was one of the first five investments NJDOI made in the alternatives space. One of the staff members who was instrumental in that initial deal with Blackstone, also brought the relationship to its apotheosis in 2011: their $1.8 billion strategic relationship. Christine Pastore, former co-head of alternative investments at NJDOI, says the real turning point for the fund was, in fact, a year earlier, with a regime change.
In an unlikely twist of fate, NJDOI owes its second wind to a politician. The previous director retired after a decade in senior positions, and newly minted Governor Chris Christie took the departure as an opportunity for an overhaul. According to people familiar with the situation, the director’s legacy included a clutch of very questionable investments—some of which are still being flushed out of the portfolio.
Christie handpicked prominent finance types to do a full-scale review of the fund’s portfolio and operations. One of them—former Carlyle partner and current managing director of Cheyenne Capital Robert Grady—became the investment council’s chairman. He led a search to fill the directorship, recruiting Tim Walsh from the Indiana State Teacher Retirement Fund to lead pension system.