Blackstone Group LP, the world’s largest private-equity firm, is taking aim at the $5.4 trillion of cash on corporate balance sheets in the U.S. and Europe as regulators weigh changes that may reduce the appeal of money- market funds.
The firm has started a money-management unit called Blackstone Treasury Solutions Advisors LLC that will cater exclusively to corporations. Its portfolio managers include Blackstone chief financial officer Laurence Tosi and Treasurer Matthew Skurbe, who help run New York-based Blackstone’s internal cash management strategy.
Blackstone is targeting company treasurers as the U.S. considers requiring money funds to shift from stable share prices to floating valuations. For Blackstone, providing cash management for corporations would help diversify income streams further, after chief executive officer Stephen Schwarzman added real estate, hedge funds and credit vehicles to reduce reliance on leveraged buyouts.
“It could be a highly profitable activity for Blackstone,” said Anthony Carfang, a partner at Treasury Strategies Inc., a Chicago-based treasury consulting firm. “The investment management business is highly scalable.”
Peter Rose, a Blackstone spokesman, declined to comment on Treasury Solutions. The parent company incorporated the money-management unit along with the Blackstone Treasury Solutions Master Fund LP in March and the registration took effect in April, public records show.
Corporate treasurers rely on money-market funds to manage cash because the funds maintain a fixed $1 share price. That could change as U.S. regulators, seeking to avoid a repeat bailout of the $2.56 trillion industry after the 2008 collapse of the Reserve Primary Fund, evaluate requiring managers that invest in corporate debt to let their share prices fluctuate.
“The money-market funds no longer being booked at net asset value would be a significant issue for corporations,” said Michael Gannon, the former treasurer and chief planning officer for Molson Coors Brewing Co. in Denver. “It would certainly be a reason that treasurers might look at alternatives.”
Without a stable share price, treasurers may be spurred to seek alternative ways to invest their cash that provide added yield without a big increase in risk. Tosi and Skurbe, who came to Blackstone from Merrill Lynch & Co., according to the investment advisory registration with the U.S. Securities and Exchange Commission, currently help invest some $1.3 billion Blackstone cash in assets ranging from mortgages to hedge funds to eke out extra yield.
Large bond managers such as Pacific Investment Management Co., based in Newport Beach, California, and BlackRock Inc. of New York also have funds investing in shorter-dated securities. Banks such as Wells Fargo & Co. and JPMorgan Chase & Co. offer treasurers a suite of services for daily cash management, including Internet portals that allow them to choose among money-market funds in which to deposit excess cash, Gannon said.
Offering corporate money management may also help Blackstone maintain relationships with companies whose pension plans decide to reduce their investment in private equity, said Eileen Neill, a managing director in the consulting division of Wilshire Associates Inc., a Santa Monica, California-based financial advisory firm. Corporate pension plans have been moving into bonds as part of an effort to reduce the impact of market swings on their financial statements, she said.
“This has everything to do with the fact that corporate defined-benefit plans in the U.S. are meaningfully reducing their exposure to riskier assets,” Neill said in a telephone interview.
A cash-management product may even help Blackstone gain access to corporate 401(K)s, also known as defined contribution plans, according to Neill.
“Right now, private equity is completely shut out of the defined-contribution industry because they don’t offer daily liquidity,” she said.
The treasury solutions group will be part of Blackstone Advisory Partners LP, a unit that provides advice on corporate restructurings and mergers and helps outside private-equity and hedge funds raise money, according to the brochure. Blackstone recently modified the license of advisory partners to permit it to provide capital markets services, such as underwriting stock and bond sales, the parent company said in its annual report.
Blackstone Treasury Solutions plans to charge both management and performance fees, the filing shows, and the unit will require a minimum initial commitment of $50 million. It will have the leeway to invest in a range of fixed-income products, according to the registration, including mortgages, asset-backed securities, leveraged loans, managed futures and interest rate contracts. It will also invest in both Blackstone and third-party hedge funds.
The SEC filings doesn’t specify how corporations would invest with the unit, or spell out whether clients would be able to withdraw their money daily or face waiting periods.
The three portfolio managers for the Treasury Solutions funds are Tosi, Skurbe, and Joseph Rocco, a vice president who is involved in credit and risk management for Blackstone’s treasury operations. Their internal treasury cash-management strategies generated $25.8 million of income and $8.6 million of capital gains during 2012, according to the annual report. Assuming the capital gains aren’t part of investment income, the strategy would have generated a total return of 3.3 percent on average assets of $1.05 billion for the year.
“They do actively manage that to get a little bit of incremental yield,” said Meghan Neenan, a senior director at Fitch Ratings Ltd. in New York. “But it is all fairly conservatively managed and very liquid.”
Corporate treasurers generally forecast future cash needs and then invest accordingly, said Carfang at Treasury Strategies. Cash to run the business is typically kept in money- market funds or bank accounts, with reserves placed in investments that mature in 90 to 100 days. The remainder can be invested in longer-dated securities that provide higher yields.
U.S. corporate cash increased to $1.79 trillion at the end of last year from $1 trillion in 2000, according to an April 4 report by Treasury Strategies. Corporate cash totaled 1.93 trillion euros ($2.53 trillion) in countries that use that currency as of Dec. 31, and the comparable U.K. figure stood at 730 billion pounds ($1.13 trillion). With the U.S. Federal Reserve keeping interest rates near record lows, treasurers are challenged to generate income from their excess cash.
After coming under pressure from hedge-fund manager David Einhorn, Apple Inc. said last month that it would seek to return an additional $55 billion to stockholders through dividends and share repurchases. Apple earned a 2.3 percent return, including dividends, interest and capital gains, on the average cash and securities of $101.4 billion held on its balance sheet during the fiscal year ended Sept. 29, 2012, according to the company’s most recent annual report.
“Corporations have so much cash on their balance sheets and treasurers are saying there is no yield to be gotten anywhere,” said Gannon, a director at the National Association of Corporate Treasurers.