The Blackstone Group has hired a lobbying firm, California Strategies, to try to prevent placement agents from being paid like lobbyists in California.
California Strategies is specifically tasked with arguing against a provision in a proposed California law that would prevent placement agents from being paid success fees in fundraising efforts.
The proposed bill would treat placement agents as lobbyists, exposing them to stricter disclosure requirements, as well as ending payments for successful fundraisings. Placement agents under the proposed bill would instead be paid flat fees up front, as are lobbyists.
CalPERS' goals of transparency and disclosure are ones we support. [But] we would argue that contingency fees make a lot of sense.
Blackstone, which has a fundraising affiliate, Park Hill and Park Hill Real Estate, supports beefed up disclosure requirements for placement agents, and also supports ending political contributions made by placement agents to officials in charge of investment decisions at public pensions.
But the firm takes issue with one provision in the proposed California law that would put an end to so-called “contingency fees”, or payments made to placement agents based on the success of a fundraising.
The contingency fee is more than just compensation, according to Blackstone spokesperson Peter Rose. The payments give placement agents like Park Hill an incentive to perform extensive due diligence on funds because they will only take fundraisings they believe will be successful.
“Unless a fund is going to be successful, they’re not going to be paid,” Rose said. “We [Park Hill] only take on about 5 percent of the funds we look at.”
The California Public Employees’ Retirement System co-sponsored the proposed bill. Blackstone is not fighting CalPERS, and agrees with most of what CalPERS wants to see from placement agents, including more disclosure, Rose said.
“To characterise this as a dispute between Blackstone and CalPERS is misleading,” Rose said. “CalPERS’ goals of transparency and disclosure are ones we support. [But] we would argue that contingency fees make a lot of sense.”
Placement agents have faced a slew of proposed or new regulations on their business since the public revelation of a massive pension pay-to-play investigation in New York last March. Investigators found that political fixers were charging private investment firms illegal fees to arrange commitments from New York’s massive state pension.
The investigation spread across the country to New Mexico and California, where similar practices were allegedly taking place. The US Securities and Exchange Commission has proposed a national ban on placement agents interacting with public pensions on behalf of their private investment clients.
The SEC ban has been roundly opposed by the private equity industry, including by Blackstone and even by the firm’s head, Stephen Schwarzman. Schwarzman argued in a letter to the SEC in September that the creation and growth of his firm was due in large part to the assistance of placement agents.
“Without the assistance of CS First Boston and Bankers Trust, I can assure you that our fundraising efforts for our first private equity fund would have utterly failed,” Schwarzman wrote. “Blackstone would have been a very different firm today and may not even have survived at all.”