blackstone invests to edge out wall street - ft

8/13/2014 Blackstone invests to edge out Wall Street - FT.com

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August 10, 2014 9:01 pm

Blackstone invests to edge out Wall StreetBy Henny Sender in New York Author alerts

Blackstone is stepping up its investments in data and technology companies that will enable it to bypass its traditional bankers and

brokers, complicating the lucrative relationship between the worlds largest private equity company and Wall Street.

We think technology is a naturally disrupting force for positive change in the industry, says Laurence Tosi, the Blackstone chief

financial officer who is leading the new investment thrust. Its investments have also been designed to help Blackstone manage its

portfolio companies, communicate with its investors and safeguard its systems, but nevertheless are shifting the delicate balance of

power in financial services.

Its latest investment is in Ipreo, a capital markets data provider that it bought with Goldman Sachs from KKR in April. Ipreo can

support Blackstones brokerage unit, its growing capital markets operations and its GSO credit arm by making it easier for Blackstone

to deal directly with those who buy its debt and equity and that of its portfolio companies, instead of paying Wall Street to act as its

agent.

No client paid more in investment banking fees to Wall Street last year than Blackstone, which handed over $882m to banks in 2013.

So far this year, when the share of US investment banking fees coming from private equity has reached a record 32 per cent,

Blackstone has been the second largest source after Carlyle.

Cutting out Wall Street could save hundreds of millions of dollars, but risks upending the cozy relationship private equity groups such as

Blackstone enjoy with the banks.

Blackstones importance to Wall Street has paid dividends. In 2010, when its investment in Hilton Hotels was struggling in the wake of

the global financial crisis, it persuaded banks to forgive $4bn in Hilton debt on very favourable terms.

Blackstone executives called around to remind banks how much it paid them in fees, according to people familiar with the

conversations. Distressed debt players trying to get hold of chunks of the debt say they watched in disbelief as the banks caved, in the

words of one such person.

Blackstones technology investments include iLevel, which Mr Tosi helped launch with Blackstone money. iLevel gives Blackstone and

investors in its funds real time data on the performance and valuation of the companies they own.

Using technology to improve data collection has allowed Blackstone to cut the number of accountants working on its behalf to two dozen

from more than 100. The success of iLevel allowed Blackstone to spin it out in 2009. More than half of Blackstones private equity

competitors now use iLevels technology.

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Blackstone now carries nine investments on its balance sheet with initial investments of up to $5m, overseen by Mr Tosi, who spent

much of his career at GE in business development and helped create Ipreo when he was at Merrill Lynch.

Blackstone continues to rely on banks for capital and information, and because of the sensitivity around the Ipreo deal, it made the

investment indirectly, through one of its funds.

The tension inherent in such investments comes as part of a larger change. Clients such as Blackstone increasingly structure, arrange

and underwrite deals themselves, treading on Wall Streets traditional turf in the process.

Today, for example, Blackstones GSO credit arm can easily underwrite $1bn in debt and place what it does not want with other

investors, bypassing banks altogether. Its broker arm is already beginning to participate in the selldown of shares in its listed portfolio

companies.

Banks are facing a multitude of challenges as regulators constrain many of their most lucrative activities and require them to hold more

capital, eating into their profits and return on equity.

But technology companies such as Ipreo and the privately owned Bloomberg also threaten banks as they force more transparency and

efficiency, cutting margins in many of Wall Streets most opaque practices.

More transparent activities such as equities trading have become much less profitable than opaque instruments such as junk bonds,

thanks in part to companies such as Ipreo. Today, there is a role for service providers who see more of the flow says Scott Ganeles,

Ipreos chief executive. Wall Street is being squeezed in multiple directions.

One of Ipreos most prized functions is an extensive database of investors, which it uses to distribute offer memos and aggregate

demand for issuers, especially in the equity market. While its focus has been on providing intelligence about investors to Wall Street

and companies, it is now working on applications for investors that predict the deals they may be interested in based on past buying

patterns.

Banks have formed their own technology companies in previous years and spun them out in the hope that greater efficiency and

volume would compensate for the margin-eroding transparency they provided. Markit, which shed light on pricing in the credit default

swap market, was one such creation of a group of banks, which now has a market capitalisation of $4.5bn.

Banks are now cutting back on such investments, however. Wall Street was notorious for overspending on technology, says one senior

investment banker. The banks are less able to roll the dice on new technology.

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blackstone invests to edge out wall street - ft

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