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Blackstone chases Buffett, but will maintain traditional strategy

The Blackstone Group (BX) is toying with the creation of a “core” private equity platform that would compete with the likes of Warren Buffett’s Berkshire Hathaway (BRK), as first reported earlier this week by Reuters.

The idea would be to maker longer-term investments in slower-growth, lower-risk companies than are typical of private equity — and match that will more modest fees and return expectations. Target backers would be large institutions like state pension funds and sovereign wealth funds, from which Blackstone reportedly wants to raise upwards of $12 billion (at $2 billion a piece).

Why is Blackstone doing this? Part of it is to increase fee-paying assets under management, which likely would be applauded by Wall Street analysts. It also would give Blackstone more investment flexibility, as traditional private equity fund terms require portfolio companies to sometimes be sold before the firm otherwise would like to exit. Remember, no one tells Buffett he needs to sell a company because of market-standard fund terms.

But what’s important to note is that Blackstone’s move, if it does come to fruition, is not at all an admission that ‘traditional’ private equity no longer works. This was the claim of financial journalist Susan Webber (a.k.a. Yves Smith), on a post at her Naked Capitalism blog:


Instead, Blackstone is moving full-steam ahead with its plan to raise around $16 billion for its seventh flagship private equity fund, with formal documents expected to be distributed any day now. And chances are that it will tout rising fund performance, including a 19% net IRR on Blackstone’s sixth flagship PE fund (through Sept. 30).

The new fund may indeed have more favorable LP terms than have past Blackstone funds — per a broader (and welcome) industry shift — but any “core” private equity product from Blackstone would be in addition to its traditional private equity platform, not a replacement for it.

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