Make no bones about it: private investment managers have increasingly found themselves in the public crosshairs in recent years. Spurred by surges in populist political and media rhetoric, as has been the case with the current US presidential election campaign, managers have found themselves more maligned in broader society than usual.
Ironically, the high industry-wide returns made during the recovery that followed the global financial crisis of 2008 have not helped their cause. Though attracting record amounts of institutional dollars, mainly from public pensions, these strong performances have added fuel to the fire for anti-wealth commentators, specifically in relation to managers’ fees and incentives.
For Blackstone, the time has come to respond to the clamor. In February, before the covid-19 virus became a global pandemic, the firm’s president Jon Gray used this exclusive interview to explain his view that to not do so could do as much damage to the industry as some of the assertions that are being made about it.
Having spent significant resources on extolling the benefits to communities of private investment by private fund managers, and having racked up the societally positive “non-financial KPIs”, Gray is nowadays dedicating considerable headspace to thinking about how Blackstone can most effectively communicate its credentials as a good corporate citizen and, critically, to whom. A standard-bearer for the sector, he knows that Blackstone’s behaviour reflects clearly on the wider industry and vice-versa.
Speaking from the firm’s New York City headquarters, Gray admitted the industry was not effectively telling its good news story. He was also adamant that more can be done to dispel the sensationalised and outmoded myths about private investment markets that are held by many outside the industry. Here’s the transcript.
Let’s discuss the reach of the problem. Who is in the crosshairs?
It’s not so much in Asia. It’s the US and it’s Europe, including the UK. The folks who view us in a very negative light don’t differentiate our activities. It could be infrastructure, could be private credit, private equity or it could be real estate. They just view us as investment firms. It all runs together. But private equity, because of the nature of the activity, its perception, tends to get the most heat.
And what are the main criticisms as you see them?
There’s a whole range. And I don’t believe any of them, by the way. But I’ll go through them: we overcharge clients; deliver crummy returns worse than the stock market; we’re not transparent; we buy businesses to pillage them, fire all the people, somehow take out enormous fees and make lots money from these; we wreck communities; we’re insensitive to the environment; we avoid paying tax both when buying and selling and on our carried interest; we are viewed as a destructive force and, if eliminated, then everything will be better.
That’s so frustrating for us as we couldn’t be prouder of our mission, our people and what we do. There’s all this focus on using leverage in our companies, on high rates of failure. There’s not a lot of objectivity, nor fair selections of facts. There’s this monolithic perception that we’re not good actors.
OK, so let’s discuss the right private investment market response.
What we, and I think others, have begun to do is say “look at our business and ask us, actually, what have we done?” For starters, we have made $184 billion for our investors, most of which went to public pension plans. Ask any major public pension plan, they would say their alternative assets have been critical, particularly in this 0-2 percent global interest rate environment.
One article that troubled me was that we give crumbs to the pensions. Every quarter, we post our returns. You can see over 35 years every fund we’ve done and the returns we’ve generated. The reason our customers keep coming back is because we’ve done a great job deploying capital in a whole range of industries and geographies. To me that’s so important. And we take our responsibility around transparency and disclosures incredibly seriously.
To the idea we destroy companies: Hilton, our biggest investment and one of our longest holds – was just named by Fortune for the second year running the number one company in America to work for. The number two company, Ultimate Software, is also a current Blackstone portfolio company. With these companies, we’ve taken them, grown them massively, improved their cultures and created a lot of value for investors. How is that a bad thing? We’ve got this immense pride. And yet there’s this caricature. I’m not going to say everything we have done is perfect. But I can tell you there’s intent to be really good actors. We’re trying hard.
You used the word “facts” but also that your criticism comes from those who are uninterested in the facts. So, is there a more effective way to communicate with your detractors?
Our critics hold a visceral view that we’re highly successful people engaged in capitalism, and definitionally think somehow that’s not right. But I don’t see the goal as convincing people who have already decided we’re guilty without evaluating facts. The goal here is to educate the vast majority of people who may not know what private equity is. People who, if you present the facts, will say ‘oh, what you guys do is not all bad’. How do we talk to people who tell us we’ve fired everyone, and we respond by saying ‘no, we’ve added 100,000 jobs’? I don’t know.
We have to do a better job telling our stories where we’ve expanded communities. Historically, we just went about our jobs. We always felt it to be important to do good. For instance, we’ve had a chief sustainability officer for the best part of a decade. But if someone were to have been critical of us, it would have been on us not being particularly focused on communicating.
Now we’re in an environment where there are big issues around income inequality and people have looked at private equity and its successes and have said it must be because they’ve exploited other people. We need to engage on the facts. And, as the biggest player in the space, obviously, we’re the ones to focus on the issue.
What are the risks inherent in not communicating your work effectively to broader society?
If we don’t respond by telling our good stories, then someone else owns the narrative.
Portfolio company employees need to feel it. I think the general feeling towards us as owners from employees is quite positive. If you went to Hilton and asked employees who owned the company before it went public, they would know. That’s important. Me reciting a bunch of facts is not as powerful as an individual who knows the company from which he or she got the job which is important to their family. That’s what matters.
The megatrends for the industry are quite positive: interest rates are extremely low, there’s a trade-off where you can trade liquidity for longer-term returns, greater alignments of interest, the ability to intervene. But what we’re talking about here is one of the big risks. Obviously, doing a bad job investing is the other. It’s really important as an industry to recognise there are people who don’t want to see us exist. And they have microphones. So, it is incumbent on us to present ourselves in a way that people understand our positive impact. I don’t see this is a temporary phenomenon either. There will always be questions, so it’s important we communicate.
What Gray said
On private equity’s problem If someone were to have been critical of us, it would have been particularly focused on communicating”
On private equity’s reputation risk “If we don’t respond by telling our good stories, then someone else owns the narrative”
On messaging financial and non-financial indicators concurrently “Our financial success does attract a lot of negative energy. How do we respond to that? It’s very hard”
On sharing created value “You could make the credible case with management teams to give them something more … of course, a challenge comes in finding one-size-fits-all programmes”
Is it possible you face a catch-22 scenario when communicating your non-financial KPIs alongside your strong financial performances with one detracting from the other?
A good point. Our financial success does attract a lot of negative energy. How do we respond to that? It’s very hard. I think we just need to tell our story better. We engage, show the facts. It doesn’t mean we, or others, can’t make mistakes. And, if we do, we should be called to account.
We need to dispel perceptions. For instance, the perception that shadow banking is really risky as we engage in these activities. What’s the reality? Large banks have crossed balance sheets of trillions of dollars with guaranteed deposits. They are really important institutions, but if they get into financial trouble, governments have to pay to keep them solvent. When we go into private credit, we’re much less leveraged and we’ve got knowing investors who have made choices to enter our funds. If the funds don’t work out these sophisticated investors are hurt, but there’s no systemic risk.
Shouldn’t part of the solution come in sharing the value created by private equity? Is profit distribution wide enough?
This drives to the heart of the income inequality issue. There’s obviously a balance needed. We are fiduciaries after all. But you could make the credible case with management teams to give them something more. There could be incentives around carbon emission offsetting, diversity as well as success sharing. Also, initiatives around severance and job training after replacing staff. These are all areas requiring thought. Of course, a challenge comes in finding one-size-fits-all programmes that can work across so many business units. I can present to you 25 different examples and they would each have different pluses and minuses associated.
Blackstone’s non-financial KPIs
US pensioners invested in Blackstone funds, plus millions more globally
Gains for investors, many of which are public pensions
Net jobs added by Blackstone companies since 2005
US military veterans hired
Bankruptcy in more than 700 control investments since 2005, and no liquidations
Average reduction in energy use at targeted portfolio companies. Blackstone also has the largest private apartment complex solar project in the US
Charitable foundation supporting student entrepreneurs
Some of the criticism stems from the perception private equity buys and dismantles businesses, particularly the distressed, and reduces economic activity and social productivity. At Blackstone, what proportion of your investing last year would you categorise as distressed?
Today, the only businesses that are distressed tend to be in challenged industries like old media, landline phone companies and certain retailers. I’d say there are some traditional buyouts that require more significant operating intervention. We’ve done recent deals that fall into this category such as the bank Luminor or building supplier CRH in Europe. But approximately three-quarters of the capital deployed in our flagship private equity funds last year was invested in growth-oriented companies.
Is part of the problem also the very name of the industry: private equity?
The name is not perfect. It used to be the LBO business but has become much more. What is changing will help mitigate perceptions too. In the old days, it was mostly about buying mature businesses and making them more efficient. And, to a degree, it still is. But increasingly we, and others, are doing more in faster-growing businesses. Last year, look at the deals we did like dating app owner MagicLab, cloud software provider Ultimate, or app advertisement firm Vungle – examples of low leverage deals with little transition to do. I don’t see a silver bullet to the reputation issue but I do believe, if we’re really focused on creative ways to be responsive, that we can reduce the friction out there. It’s a long-term campaign.
What is the greater barometer of success for private managers: being reliable return generators to investors and shareholders or being of value to broader society?
I don’t see them as mutually exclusive. If we’re delivering great returns, then definitionally, given our customer base, we’re doing something really powerful. Our customers are pension funds after all. So, I would prioritise delivering great returns. But I do believe, in the process, we take care of our customers. It’s a myth to think if you have financial success it’s at the expense of workers. I haven’t figured out how businesses have made money where they’ve dramatically reduced the headcount. You have to grow to make businesses successful.