The Blackstone Group began life in 1985 as an M&A advisory boutique, formed by a trio of former Lehman Brothers bankers. Today Blackstone announced plans to spin off that historical vestige, which long ago was eclipsed in size by its direct investment practice in areas like private equity and real estate. In addition, Blackstone (BX) will unload its restructuring advisory and its third-party fundraising units. All of it will be merged with PJT Partners, an existing advisory boutique led by former Morgan Stanley banker Paul Taubman. The deal is expected to close sometime in early 2015, with Blackstone shareholders to own an initial 65% stake in the combined, publicly-traded company.
PJT Partners will not have any restrictions on it in terms of future competition with Blackstone, such as if it wants to eventually launch a direct investment business. There also is no scheduled divestment plan for Blackstone shareholders like firm CEO Steve Schwarzman.
Blackstone says it is making this move because the advisory business has been artificially hampered by potential conflicts of interest with the investment side, even though the firm historically has taken great pains to say that appropriate firewalls are in place. For example, Blackstone’s restructuring group never even bid for the Lehman Brothers bankruptcy business, because of concerns that the credit and real estate sides of the house might bid on Lehman assets.
No doubt the conflicts are real, and have hurt Blackstone’s advisory business. Moreover, they have been exacerbated by the accelerated growth of Blackstone’s credit platform (GSO Capital Partners) and its new $5 billion multi-asset class platform (Tactical Opportunities).
But there seems to be something deeper going on here: Namely, Blackstone’s advisory business has been struggling for quite some time.
Blackstone’s M&A advisory business had consecutive annual revenue losses in 2012 and 2013 — even though global M&A volume increased substantially over that same period. Perhaps that explains why of the group’s 57 senior investment professionals as of August 2013, just 33 remain (according to Blackstone’s website). Among those who have left are six senior managing directors: Denis Fabre (London), Jitesh Gadhia (London), Kemal Kaya (Istanbul), Jon Koplovitz (New York), Tom Middleton (New York) and Tom Stoddard (New York). It is unclear if the departures were caused by dissatisfaction among M&A staffers borne of being handcuffed by potential conflicts of interest, or if Blackstone felt it needed to clean house. Many of the positions have since been filled by new hires.
The M&A advisory business began to rebound slightly in Q2 2014, but that was largely offset by losses in its restructuring advisory business — the one area that actually had grown in 2012 and 2013 (worth noting that 23 of 24 senior restructuring staffers from August 2013 are still around).
“They have a problem,” says a source familiar with the situation. “The M&A advisory business has been getting killed for years, and they don’t believe the market conditions are going to be right for restructuring to keep growing. Why deal with all that when the rest of your business is growing so strong?”
Indeed, Blackstone’s overall growth rate was 63.9% last year, whereas the overall advisory business came in at just 14.6% (as pointed out earlier today by Bloomberg’s Katie Benner). And given that the advisory business represented just 6.7% of Blackstone’s revenue last year, the divestiture makes even more sense.
Perhaps that’s what Steve Schwarzman was getting at this morning, in a voicemail he left for Blackstone employees about the split. He told them that financial terms sometimes are the victims of their own success and of the success of their investment areas. Or, put another way, time to cut the dead weight and hope that it can come back to life in a more focused environment.
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