In late 2011, leaders of the G20 countries asked the Financial Stability Board to develop ways to identify financial firms outside of banks or insurance companies that are “systemically important”—those whose distress or demise ”would cause significant disruption to the wider financial system and economic activity,” according to a consultative document published in early January by the FSB and the International Organization of Securities Commissions.
The document, which is out for public comment through April 7, sets down proposed methods for identifying firms in three categories that, in short, might be too big to fail. The three categories are finance companies, market intermediaries and investment funds, and within investment funds the document specifically mentions hedge funds, private equity funds and venture capital funds.
As one of the largest private equity firm by assets under management, The Blackstone Group would almost certainly come in for a review under the FSB’s guidelines. Some of the criteria it appears to meet. For example, the threshold size is $100 billion in assets under management. While Blackstone Group has no single fund anywhere near this size, it did have a total of $266 billion under management as of year-end, with $66 billion of that in private equity, and $56 billion allocated to hedge funds. The document also notes that “the greater a fund’s leverage, the greater its potential impact on counter-parties that have provided finance…” Like other buyout firms, Blackstone Group does not leverage at the fund level with its private equity assets, but many of the underlying portfolio companies are leveraged.
Blackstone Group appears ready to argue forcefully against a “systemically important” designation. A spokesperson noted that no taxpayer dollars are at risk in any Blackstone Group business; investments by third parties in Blackstone shares, limited partnerships and portfolio companies typically represent a small part of their overall portfolios; the 10-year lock-up of private equity funds prevents a run on the bank by limited partners and allows the firm to ride out economic ups and downs; and creditors of portfolio companies have no recourse other than that company to be made whole, limiting the risk of contagion to other Blackstone Group portfolio companies, funds, or the firm itself.
Whether the FSB agrees remains to be seen. Look for the FSB in the months ahead to identify systemically important firms and to propose any policy measures that should be taken to reduce the risks they pose to the global economy.