Blackstone gave Saudi sovereign wealth fund discounts to invest in record $40B infrastructure fund

Deal shines a light on private equity firm’s incentives

Oct.October 22, 2018 10:45 AM

Blackstone CEO Steve Schwarzman and Crown Prince Mohammed bin Salman (Credit: Getty Images)

Saudi Arabia’s sovereign wealth fund received discounts from the Blackstone Group last year when it pledged $20 billion for the private equity firm’s record infrastructure fund.

The perks all add up to large discounts on management fees, Bloomberg News reported. If Blackstone’s fund reaches its target of $40 billion, for example, the Saudis will pay annual management fees of roughly $111 million, while investors staking the other half of the fund will together pay about $190 million.
It’s not unusual for a private equity firm to provide perks for early investors who make large commitments. The second-largest investor so far in Blackstone’s fund — the Commonwealth of Pennsylvania Public School Employees’ Retirement System — also got a discount on its early contribution.

But the investment pledged by Saudi Arabia’s Public Investment Fund is a source of great interest considering its sheer size. And the kingdom is under extra scrutiny after the death of journalist Jamal Khashoggi set off an international scandal.

According to terms reviewed by Bloomberg, the Saudis agreed to match all other investors’ deposits in the fund, and will pay a fee discount of 15 cents for every additional dollar another investor adds.

The Saudi’s PIF originally sought partial ownership of the fund, but Blackstone rebuffed the offer. The sovereign fund did, however, retain the right to be consulted on any transactions that would come under review from the Committee on Foreign Investment in the U.S. That would potentially allow the fund to abstain from any such transactions.

A spokesperson for Blackstone told Bloomberg that fee reductions are a normal part of the business.

“Fee reductions are customary across the industry for investors of scale, especially for a decade-plus investment that is more than 10 times larger than any fund commitment we’ve received in firm history,” Blackstone said in a statement. “We believe it is also dramatically larger than any commitment by any other investor across the industry.”

Blackstone is currently raising an $18 billion real estate fund, its largest property vehicle yet. The Saudis, meanwhile, are the largest investor in SoftBank Group’s $100 billion Vision Fund, which has poured huge sums of money into WeWork and Compass, among other real estate firms.

Shares of SoftBank plummeted last week amid concerns over the Saudi Arabian government’s role in Khashoggi’s disappearance. [Bloomberg] – Rich Bockmann

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