A U.S. proposal to ban placement agents from helping private equity firms raise money from public pension funds would stifle the process of raising capital for smaller funds,
Blackstone Chief Executive Stephen Schwarzman said the private equity firm may never have got off the ground had it not been for placement agents helping it raise funds when it started in the 1980s.
Placement agents act as middlemen between pension funds looking for places to put their money and private equity funds seeking investments.
Taking the “drastic step of eliminating the function of legitimate placement agents … would have the unintended consequence of unfairly disadvantaging firms just starting out,” Schwarzman argued in a letter dated Sept. 14 but released on Tuesday.
The SEC proposed new rules in July to combat “pay-to-play” practices following a kickback scandal that erupted in New York State, and is taking comments on the issue until October 7.
While most agree that clamping down on political contributions is good, there has been controversy around a proposal that would ban placement agents from representing clients before state and local pensions.
“No one has any sympathy with unlicensed influence-peddling political fixers,” Schwarzman told the SEC. “They should be eliminated for the good of everyone in the business. But there are ways of doing this without banning an entire industry.”
Schwarzman said that using intermediaries is vital for small funds without the contacts that established firms have. He cited the beginnings of Blackstone in late 1986, when it hired Bankers Trust and First Boston (now CS First Boston) to raise money from investors.
“Without the assistance of CS First Boston and Bankers Trust, I can assure you that our fund-raising efforts for our first private equity fund would have utterly failed, Blackstone would have been a very different firm today and may not even have survived at all,” he wrote.
The business has been growing, according to London-based research firm Preqin. Of the private equity firms that raised funds in 2008, 54 percent used a placement agent, up from 45 percent in 2007 and 40 percent in 2006, it said.
The placement agent business includes brand name firms such as Credit Suisse’s placement agent unit.
Blackstone itself owns a placement agent — Park Hill Group, which raises money for Blackstone as well as newer and medium-sized funds.
Schwarzman said in the letter that he was not appealing on behalf of Park Hill but “so that you can understand clearly the role of placement agents in helping to start new firms like Blackstone.”