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Blackstone gives up its roots in advisory unit spin-off

Blackstone Group LP said on Friday it would spin off its advisory units into a company headed by star Wall Street investment banker Paul Taubman, to avoid potential conflicts of interest in the sprawling private equity empire - PHOTO: BLOOMBERG

[NEW YORK] Blackstone Group LP said on Friday it would spin off its advisory units into a company headed by star Wall Street investment banker Paul Taubman, to avoid potential conflicts of interest in the sprawling private equity empire.

The advisory business, which includes mergers and acquisitions, restructuring and private equity fundraising, will merge with a firm founded last year by Taubman, a former Morgan Stanley president who has been behind some of the biggest mergers in recent years.

The new publicly traded company could be valued at US$1 billion to $2 billion, a person close to Blackstone said. The tax-free spin-off is expected in 2015.

The surprise move is a stark example of potential conflicts of interest that could arise in companies with unwieldy, sprawling interests and attract regulatory scrutiny.

Blackstone started three decades ago as an advisory business, but has since grown into a diversified alternative asset manager with more than US$300 billion under management in private equity, real estate, credit and other assets.

There is no suggestion that any specific regulatory action led to Blackstone's decision. The firm said its primary business, which includes buying and selling companies and real estate assets, as well as lending to such companies and buying their debt, places restrictions on the use of its advisory arms, hindering their growth.

The advisory business is a small part of the firm, accounting for about US$185 million of Blackstone's total revenue of US$3.7 billion in the first half of the year. Blackstone has a market value of $34 billion.

Blackstone said the timing is right for the spinoff: M&A is picking up, restructuring remains an active business, private equity fundraising is on the rise, and Taubman is available.

"This has the potential to unlock value for our shareholders," Blackstone co-founder and Chief Executive Stephen Schwarzman told analysts on a conference call.

Blackstone's shares ended down 0.6 per cent at US$29.6 on Friday.

The new company, whose name has yet to be decided, will advise companies on mergers and acquisitions as well as debt restructurings. It will also help private equity and other alternative investment funds with their fundraising efforts.

Blackstone's current shareholders will own 65 per cent of the new publicly listed company. Taubman, his firm's partners and Blackstone's advisory employees will own the rest.

Taubman, who left Morgan Stanley in 2012 and founded his own firm last year, has been behind some of the biggest deals of the past few years. These include advising Verizon Communications Inc on its US$130 billion takeover of its wireless joint venture with the UK's Vodafone Group Plc, and Comcast Corp on its US$42 billion deal to buy Time Warner Cable Inc.

Blackstone President Tony James approached Taubman with the idea of partnering in late spring, according to Taubman. A meeting between Schwarzman, James and Taubman soon followed.

Blackstone started sensing limits to the advisory business' growth as part of the firm, as questions of potential conflicts of interest came into sharper focus after the financial crisis.

During the Lehman Brothers bankruptcy in 2008, for example, Blackstone's real estate division was eyeing some of the bank's assets. As a result, Blackstone had to tell its advisory bankers not to pursue a role in what they saw as one of the most complex and interesting opportunities of the last decade.

Investments of Blackstone's credit arm, GSO Capital Partners, have also curtailed its advisory arm, which ranks as the world's most active debt restructuring advisor according to Thomson Reuters data.

Executives started talking about the idea over the last couple of years.

Tim Coleman, who heads Blackstone's restructuring team, and Daniel Prendergast, CEO of Park Hill, will keep their roles and join the new company. Park Hill is a private equity fund placement agent that Blackstone acquired in 2005.

John Studzinski, who heads the advisory business, will help with the transition, but remain at Blackstone. Studzinski joined Blackstone in 2006 and has been personally involved in many of the firm's largest advisory assignments.

Taubman, who boasts relationships with governments, corporations, pension funds and wealthy individuals across the globe, will remain on the executive committee of Blackstone and advise the firm.

Blackstone was founded by Schwarzman and the now-retired Peter Peterson in 1985 with US$400,000 as an M&A advisory boutique. It was not until 1987 that the firm launched its first private equity fund, and then set up its debt restructuring business in 1991.

Over the years, the advisory business has undertaken some of Wall Street's most prestigious investment banking mandates, advising Bank of America Corp on the US$5 billion investment it received from Warren Buffett's Berkshire Hathaway Inc and American International Group Inc on its government bailout.

Yet, in recent years, the advisory business has not been a meaningful earnings contributor to Blackstone, with other assets such as real estate investments and leveraged buyouts bringing in the bulk of the firm's profits.

It is not the first time Blackstone has let a business go. BlackRock Inc was spun out of Blackstone in 1992, subsequently growing into the world's largest money manager and leading Schwarzman to public acknowledge that decision as a mistake.

Simpson Thacher & Bartlett LLP is advising Blackstone and Weil, Gotshal & Manges LLP is advising Taubman's firm, PJT Partners, on the transaction. - Reuters