In a CNBC interview on September 22nd, Blackstone’s President, Tony James, said there are four primary reasons why private equity serves as an engine of economic growth. Because of time, he was only able to share the first two. We have received many requests for Tony’s “Top Four”, so here they are.
1. Rescuing our troubled companies
In tumultuous times, many companies run into trouble. Because of the stock market’s short-term focus, the aggressive nature of hedge funds and other institutional investors today, and the high turnover rates for America’s CEOs (who average only about 3½ years in the job), it is very difficult for public companies to get the time needed to complete complex reengineering of their business models.
Shielding a company from quarterly pressures, private equity brings the patient capital and specialized operational expertise to fix the company and start it growing again. If America can’t nurse our struggling companies back to health, our whole economy will struggle in turn.
For example, in 2010 we purchased a mothballed refinery in Delaware that the prior owner had not been able to operate profitably. We brought in our refinery management team and after investing $350 million, restarted the refinery in 2011. In so doing, we saved 700 high paying jobs directly and could create another 1,800 at suppliers, while generating approximately $100 million per year in tax revenues for the state in the process. Another recent example: last year we acquired the failing community hospital network in Detroit and committed $850 million of new capital to save and upgrade this critical asset.
Overall, our companies added 3% new jobs in America last year compared to 0.7% for the U.S. as a whole. Including the jobs preserved through the rescue of the Detroit Medical Center mentioned above, our companies added 8% jobs in 2010. If the rest of American industry had done this, our unemployment problems would be behind us.
2. Growth capital for exciting young companies
In the last five years, we have invested over $3 billion in start-ups – more than any venture firm in the world. New companies create 65% of the added jobs in America. Too young to go public or rely on debt, these companies need equity to grow. Big opportunities need large amounts of long-term, risk-oriented equity capital, which only private equity can provide.
We are currently funding a new company called Transmission Developers Inc. with $500 million of Blackstone equity for a $2 billion project, which will include the installation of a cable submerged on the bottom of Lake Champlain and the Hudson River that would bring clean, renewable wind and hydro power from Quebec to New York City. This is estimated to save New York consumers $800 million each year on their power bills and relieve the New York metro area’s dependence on its aging grid in an environmentally sensitive and cost-effective manner. In another investment this year, we committed $1.7 billion to build the largest offshore wind generation facility in Germany to facilitate Germany’s transition from nuclear power to renewable energy.
3. Pension funds need to meet their obligation to their pensioners.
The money we manage comes mostly from pension funds. Indeed, we manage assets for half the pensioners in the U.S. Virtually all public pension plans are under-funded. In order to meet their commitments to retirees, pension funds will need to earn over 8% return per year. With equities earning only 1% cumulatively over the last ten years and long-term treasuries yielding under 2%, the higher returns on alternative investments are the only way pension plans can earn enough to meet their obligations. Without alternative investments, there will be need for either massive taxpayer bailouts or we will leave our elderly destitute at their most vulnerable stage in life.
Our funds, for example, have generated annual returns approximately 1,200 basis points over the S&P 500 stock index since our founding 25 years ago.1 We have never had a private equity fund that lost money for its investors.
4. Helping emerging economies develop
Successful development of the world’s lagging economies is critical for global peace and stability, and provides important and growing export markets for U.S. goods. These countries are typified by limited domestic capital, low foreign direct investment, and insufficient infrastructure. By bringing large-scale risk capital to build critical infrastructure, we not only earn great returns for our investors, but improve the quality of life for millions of needy people.
Recent activities have included a $900 million hydroelectric dam in Uganda, which is expected double total electricity production in the country and lower the cost of electricity by 65% for its impoverished population. Similarly, we are building power generating plants in India and the Philippines and ports, and rail terminals in Brazil and India.
1 Information as of June 30, 2011. Past performance is not indicative of future results. The index is provided solely to indicate returns that could be earned by making equity investments. Blackstone’s funds differ from the index in that, among other factors, Blackstone’s funds are actively managed entities that bear fees and use leverage.