PE ‘power couples’ face strains in downturn

Some of the most significant LP/GP relationships are being refashioned as LPs rethink their approach to private equity.

In 2008, the California State Teachers’ Retirement System committed $270 million to The Blackstone Group’s sixth fund, a significant drop from its prior commitment to the firm of $1.7 billion.

The smaller commitment from CalSTRS was part of a growing trend of private equity limited partners re-assessing their relationships with managers, and in some cases, giving less to their long-term managers.

The CalSTRS/Blackstone relationship is one of three “power couples” examined in the February issue of Private Equity International (PEI subscribers access the full article here). The other two relationships analysed include Apollo Global Management and the California Public Employees’ Retirement System and Oregon and Lone Star Funds.

Blackstone and CalSTRS first entered a partnership in 1994 and the pension has entrusted the firm with more than $2.5 billion. The pension’s huge commitment to Blackstone V – $1.7 billion – helped the Steve Schwarzman-led firm collect a total of $21.7 billion, making Fund V the largest ever buyout fund. 

But Blackstone has had trouble reaching its goal for its sixth fund, which will reportedly close on $9 billion soon. The firm’s original goal for Fund VI was $20 billion, and has been consistently lowered.

Several factors explain the firm’s inability to reach its fundraising goal, including the fact that the firm entered the market as the global financial meltdown was just heating up. Shortly after Blackstone began fundraising, Bear Stearns was rescued by the US federal government and eventually sold to JPMorgan for $2 a share.

A spokesperson for CalSTRS declined to comment on the relationship, but said “as the market slipped into recession, the opportunities for buyout activity have been limited”. In its latest semi-annual performance report, the pension cites mega-funds as being the most affected by the financial crisis: “The lack of leverage is believed to have hit the largest firms the hardest, as investors have greater concerns about how the mega-funds will operate in the market environment going forward.”