Throw out the fixers, but not the entire industry

Blackstone boss Steve Schwarzman’s to the SEC in September made for interesting reading. In it he argued that Blackstone as we know it today would not exist had it not been for the smart advice of placement agents helping it to raise money.

After the firm’s inception in 1985, Schwarzman and his partner Pete Peterson had knocked themselves out trying to persuade institutions to commit capital to Blackstone’s debut private equity fund. It was only after they enlisted a couple of investment banks for help that investors began to take notice. Without these agents, Schwarzman wrote, “our fundraising efforts […] would have utterly failed”, and Blackstone “may not even have survived at all”.

Schwarzman made the point in order to help persuade the SEC not to ban placement agents from intermediating between fund managers and pension funds in the US. The regulator is mulling such a move in response to the well-documented scandal that broke earlier this year in New York State and New Mexico involving what Schwarzman described as “unlicensed influence-peddling political fixers”. By all means deal with those, is the message to the SEC – but please think of the baby as well as the bathwater.

The SEC will do well to heed the advice. This is not because banning placement agents will make it harder for Blackstone to grow its asset base, or damage Park Hill, the firm’s own fund placement operation. It is because all but the largest and most sophisticated institutional investors will find it much more difficult to make good manager selection decisions if agents aren’t allowed to help pre-select appropriate opportunities. For part of the value added that placement specialists provide is precisely that  – the screening and vetting of those asset managers that pension investors with limited due diligence capabilities of their own should pay attention to, and the weeding out of the ones they should avoid.

In infrastructure, this service is particularly important. Infrastructure is a young asset class, where few fund managers can point to a readily verifiable track record that is based on solid, reliable data. As a result, manager selection in infrastructure is even more art than science than it is in other parts of the alternative investment universe.  Whilst many public pension funds, in the US and elsewhere, are increasingly enamoured with the rationale for allocating capital to infrastructure, not many have the knowledge and the confidence to make investment decisions on their own. Buy-side consultants and gatekeepers make this job easier, but so do professional placement agents who work with the managers, and to take them out of the picture would be to do the end-investors a disservice.

Helping investors find and access the right funds arguably matters even more now that infrastructure fundraising has slowed to a trickle. According to numbers compiled by our data service, less than $10 billion of equity capital has been raised for infrastructure funds so far this year, against $55 billion, $56 billion and $66 billion raised in 2006, 2007 and 2008 respectively. There are several reasons for this slowdown, and even a world-class placement agent will find it a challenge to help clients garner meaningful commitments in the here and now. But once fresh capital allocations pick up pace, the presence of well-qualified, regulated and transparent advisers on the sell-side will make the fundraising process easier for everyone – including Blackstone, by the way, which is currently seeking commitments to its first ever infrastructure fund. But that’s not the reason why Schwarzman wrote his letter.