Blackstone Rejects SEC Request for Fund Data as Fortress Agrees

Date: Monday, March 30, 2009
Author: Miles Weiss, Bloomberg

Blackstone Group LP, the world’s largest private-equity firm, rebuffed a request from securities regulators to publicly disclose the performance of its buyout and hedge funds while Fortress Investment Group LLC agreed.

The U.S. Securities and Exchange Commission asked both New York-based companies to include fund returns in their financial reports, according to letters the agency released earlier this month. Fortress did so in its annual report. Blackstone told the SEC it wouldn’t.

Buyout firms and hedge-fund managers are accustomed to operating in private, and the decisions by both companies to sell shares to the public in 2007 sparked debate over how much information they would divulge. Returns are an important indicator of a firm’s ability to attract new cash from clients and increase revenue, said Conrad Weymann, managing partner at Mallory Capital Group LLC, a Darien, Connecticut-based investment bank.

“In this game, it’s track record, track record, track record,” said Weyman, whose firm raises money for private- equity and private real-estate funds.

The SEC asked Blackstone and Fortress last year to publish “performance information” in future filings. The SEC requested details including the name of each fund, the date it was formed, assets under management and net return for each period presented in the filing.

In explaining why investors should get the data, the SEC cited Blackstone’s and Fortress’s own words in previous filings. Both had warned investors that subpar performance could hinder future revenue and their ability to start new funds.

Augmentations

Daniel Bass, Fortress’s chief financial officer, responded in a Jan. 26 letter to the SEC that the company would “augment our disclosure” by providing a performance table for “all significant funds” in its annual report.

The chart in the company’s annual report, issued March 16, included returns on 25 private-equity funds and seven hedge funds with combined assets of about $29 billion at Dec. 31.

The company didn’t provide annual performance figures for buyout funds that were still making investments or were less than a year old, stating instead that some had returns to date that were “significantly negative.”

Blackstone Chief Financial Officer Laurence Tosi told the SEC in a Dec. 5 letter that disclosure of detailed performance data wasn’t required under applicable regulations and wasn’t a meaningful measurement of operating results.

“The individual rates of return have no direct impact on our financials and therefore we question the relevance to our investors,” Tosi said in the letter.

No Fund Data

Blackstone’s March 2 annual report disclosed that the fair value of its private-equity funds had a net depreciation of 32 percent last year, compared with net appreciation of 16 percent in 2007.

Blackstone had about $91 billion in fee-earning assets under management at Dec. 31, including $25.5 billion in private- equity funds and $22.9 billion in real-estate funds. The remaining $42.6 billion was in hedge funds and funds that invest in hedge funds.

Peter Rose, a Blackstone spokesman, declined to comment of the firm’s letter, which the SEC released March 16. Fortress spokeswoman Lilly Donohue didn’t return a telephone call seeking comment on its letter, released March 20.

In the prospectus for its initial public offering, Blackstone said it intends to be a “different kind of public company” whose managers take a long-term perspective. The firm won’t provide earnings forecasts because the performance of its businesses may vary in “significant and unexpected ways” from quarter to quarter, according to the filing.

Review Finished

The SEC said in a Jan. 30 follow-up letter to Blackstone that the agency had completed its review and had no further comments “at this time.”

Andy Schoeffler, a staff attorney in the agency’s division of corporation finance who was listed as a contact in the letter, declined to comment.

Buyout funds use a combination of capital raised from investors and debt to take over companies. They seek to boost the companies’ earnings through increased sales and cost- cutting. Hedge funds are private pools of capital, largely unregulated, that invest in anything from stocks and bonds to commodities, futures, derivatives and real estate.

Long Term

Because private-equity funds earn their returns by purchasing and then selling companies over a seven- to 10-year period, annual performance figures can be misleading, particularly in the early life of the partnership, said Marc Bonavitacola, who analyzes and examines buyout funds for Boston- based SVG Advisers Inc.

A private-equity fund’s actual returns can’t be judged until all the companies it has invested in have been fixed up and sold, he said.

While it would be helpful to have more disclosure, “I understand why Blackstone doesn’t want to do it,” said Daniel Fannon, an analyst at Jefferies & Co. in San Francisco. “These are points in time and the private-equity funds have a much longer life.”

To contact the reporter on this story: Miles Weiss in Washington at mweiss@bloomberg.net