A new private equity fund created by BlackRock is intended to hold companies for “up to forever” while addressing the issue of high fees, according to an article in Institutional Investor.
The fund has been created by BlackRock’s long-term private capital team (LTPC) under the leadership of Andre Bourbonnais and fellow Canadian Mark Wiseman (chairman of the firm’s alternative-investment unit and global head of active equities). The two men structured the new fund, the article reports, “with input from cornerstone investors to create a better alignment of interest than in traditional private equity.” Wiseman puts it this way: “We’re trying to solve a lot of the things that drove us crazy.”
BlackRock’s new fund charges 1.5 percent rather than the 2 percent management fee typically charged by private equity firms which, according to Wiseman, is excessive given how funds have grown over the past several decades. “It’s nonsensical,” he argues. “The funds got larger, larger, and larger, but the cost of running the firms didn’t grow proportionally.” But Wiseman doesn’t think a fee cut is enough to align the interests of private equity firms and investors, the article reports. “Instead,” it says, “the burden will be on BlackRock to accurately project the costs of running LTPC—or risk eating a portion of them.”
Christopher Ailman, chief investment officer of California State Teacher’s Retirement System, said he’s excited to see Blackrock step into private equity with an innovative structure that addresses the long-term interests of institutional investors: “A lot of us have been clamoring for a long time for a longer holding period and more what I like to call ‘private capital’ structure.”
Wiseman explains that, rather than holding on to strong assets for decades, private equity managers are motivated to sell companies within a relatively short time frame to “crystallize their carry” and post higher internal rates of return. But such frequent selling triggers “massive frictional costs” for investors in buyout funds, he says and is “terrible for a long-term investor.”
Bourbonnais says the new fund will invest in companies with long track records and resilience through economic cycles “so we can forecast the future a little bit better.”