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Private equity firms are skilled at buying companies, whipping them into shape and selling them on at a handsome profit. Managing the frictions among well-remunerated fund managers in their own dealmaking is a different game entirely. Earlier this month, BlackRock made a splashy deal to buy Global Infrastructure Partners for $12.5bn.
BlackRock isn’t a traditional private equity firm but it is certainly ambitious in its private capital aspirations. Its target is just one of a number of successful independent managers eyed by large money management complexes. More deals are expected as pensions and sovereign wealth funds increasingly favour one-stop shops.
But for publicly traded capital managers considering such acquisitions, the tensions between fund investors, public shareholders and employees creates a high-wire act.
The bulk of the $12.5bn that BlackRock is paying for GIP will go to the latter’s six founders. Additionally, carried interest for existing vehicles will stay with GIP as well as 40 per cent of performance fees of future funds.
While the GIP top brass crystallise their billion-dollar fortunes, the economics are trickier for mid-level executives. They will not play a large part in the liquidity event. Suddenly, they must share economics with BlackRock.
Acquirers of human capital-oriented firms generally create enticing incentive programmes to attempt to retain talent. But cultural change and the potential for lower upside can drive executives away. The history of combinations in financial services is littered with examples where the prized assets quickly walked out the door.
For the listed managers, shareholders demand a specific operating profit margin along with a preference for growing steady management fees. The likes of Blackstone and Apollo have rejigged their internal accounting to shove employee pay into the distinct performance fee silo in order to prop up management fee margins.
Separately, some companies are mandating that top executives take their tens of millions of pay in company stock rather than underlying investment fund carry. Even with the huge pot of fees generated by private equity, it has proved tricky to keep all stakeholders aligned.
There are success stories in handling the highly paid talent. In 2008, Blackstone acquired GSO Capital, a credit manager with $10bn in assets managed. Today, Blackstone has $300bn in credit assets, even as most of the original GSO brass have long departed.
As private equity becomes more of an institutionalised machine, efficiencies in fundraising, cross-selling and investment processes could mean that individuals matter less than they might expect.