Top Blackstone Group executives are trying to mend relationships with some of their most stalwart investors — public pension funds — just when the company is trying to complete a two-year effort to raise $22 billion for two funds.
The Blackstone executives have been called on the carpet by some clients who are fuming at comments made by Byron R. Wien, vice chairman, Blackstone Advisory Partners LP, Blackstone's global advisory business.
During a Jan. 5 webcast with Blackstone clients, Mr. Wien answered a question about government deficits by saying, in part: “The retirement benefits for state workers, really not only in New York, California and New Jersey, but throughout the country, are very generous. Too generous. And it is very hard to change that. ... But I think we have to be more realistic. We literally can't afford the benefits we have given our retirees in state and local governments. And we have to change that.”
Mr. Wien, a well-known, veteran investment strategist, announced his annual predictions, called “Ten surprises of 2010,” on the webcast.
About a month later, Pensions & Investments published a letter to the editor from Steve Cochrane, who at the time was executive director and chief investment officer of the $3 billion North Dakota State Investment Board, Bismarck. In his letter, Mr. Cochrane recounted Mr. Wien's comments and said that if North Dakota were a Blackstone client, “I would choke on my next fee payment to The Blackstone Group.” (Mr. Cochrane died in April.)
It took a few months for the backlash to hit; Blackstone spokesman Peter Rose said executives there began receiving inquiries from a few public pension fund clients in late April or early May about Mr. Wien's comments.
Keith Bozarth, executive director at the $78.1 billion State of Wisconsin Investment Board, Madison, said SWIB officials contacted Blackstone executives ahead of a board meeting last week at which Mr. Wien spoke on broad economic and investment issues.
“Because there had been some coverage of a comment Byron made about public employee benefit levels, we did take the opportunity to let Blackstone know in advance that Wisconsin's plan is designed somewhat differently than most plans and that it is better positioned than most to weather the current market travails,” Mr. Bozarth said in an e-mail in response to questions.
“We thought it important for Byron to understand the variation among plans and the specifics of the (Wisconsin system) before he spoke.”
SWIB has committed $100 million to Blackstone's GSO Capital Opportunities Fund LP.
Mr. Wien said his remarks were misinterpreted. “I was answering a question about something related to the webcast, and my comments got misconstrued,” he said in an interview.
Blackstone executives are doing what they can to separate the company — and themselves — from Mr. Wien's statements.
For example, Hamilton E. James, Blackstone's president and chief operating officer, appeared before the New York City Employees' Retirement System and the New York City Police Pension Fund to explain Blackstone's position that the promised pension benefits should be backed up with sufficient assets to meet the obligation.
Stephen A. Schwarzman, Blackstone's chairman, CEO and co-founder, made a similar appearance before the New York City Teachers' Retirement System.
“My people make $19,000 a year and to hear that my people who don't make enough money should have their pensions trimmed too, ... that was too much for me,” said Pat Stryker, recording secretary and trustee of the New York City Employees' Retirement System.
In a May 25 letter requested by Ms. Stryker to Bud C. Larson, NYCERS board chairman, Mr. James said: “Very simply, Blackstone believes that retirement security is critical for all workers whether they are in the private sector or the public sector.
“State and local pension funds have been the single largest investors with Blackstone since our founding, and we have consistently delivered superior investment returns across all our different product areas.”
The New York funds, which have a combined $105 billion in assets, are Blackstone clients.
On June 14, P&I published a letter to the editor from Joan Solotar, senior managing director for public markets at Blackstone. Mr. Rose said Ms. Solotar wrote the letter because “a few pension plans have asked about this, and we were happy ... to clarify our position.” He declined to identify the pension plans.
In her letter, Ms. Solotar said she wanted to clarify Blackstone's position on state and local employees' retirement security in light of Mr. Cochrane's February letter to the editor. Ms. Solotar's letter is nearly identical to the one Mr. James wrote to NYCERS. Both state Blackstone's view that retirees “who put in years of service should have the means needed to live comfortably for the balance of their days.”
Among Blackstone's other clients is the nation's largest defined benefit plan, the $201.9 billion California Public Employees' Retirement System, Sacramento.
Said Rob Feckner, chairman of CalPERS' board of administration: “Obviously, I would not agree with Mr. Wien from Blackstone or anyone who is making those statements ... I would venture to guess Mr. Wien or anybody he works with makes more than 90% of CalPERS retirees,” Mr. Feckner said.
CalPERS has committed $1.4 billion to Blackstone funds since 1994. In February, CalPERS committed an additional $250 million to Blackstone's GSO Capital Solutions fund.
Mr. Rose, meanwhile, labeled Mr. Wien “an independent market commentator.”
“The remarks in question were not part of a formal presentation ... and do not represent the official position of the firm,” Mr. Rose said.
Mr. Wien is also a senior managing director at Blackstone, but he is not on the firm's executive committee, according to Blackstone's annual reports.
Hit a nerve
To be sure, Mr. Wien hit a nerve on an extremely sensitive issue.
Pension officials call it “sustainability,” referring to whether pension plans can survive long term without cutting benefits or significantly changing the plans' investments or funding.
The financial meltdown led to dramatically increased unfunded pension liabilities. Plan sponsors must either increase contributions or cut benefits in order to improve the plans' funding, as investment returns alone aren't always robust enough to do the job.
Not all state officials disagree with Mr. Wien's sentiments.
Bill Quinn, a spokesman for the New Jersey Department of Treasury, Trenton, said, “We would agree more than we would disagree with Mr. Wien's comments.”
In March, Gov. Chris Christie backed legislation cutting health and retirement benefits mostly for new state employees, with some provisions affecting existing employees, Mr. Quinn said.
Mr. Quinn noted the changes will save the state $8 billion over 15 years. Mr. Christie does not sit on the $68.9 billion New Jersey State Investment Council, but nine of its 13 members are appointed by the governor.
Investment consultants acknowledged Mr. Wien's comments have been an issue for Blackstone. One, who asked not to be named, said whether the issue grows in importance depends on what Blackstone executives say and do.
Ms. Stryker said Mr. James “handled himself very well” when he appeared before NYCERS board.
“He told us he agreed that $19,000 a year was not a lot of money. He said he had children who were trying to live on $19,000 a year and that people deserve a decent retirement.”
For her part, Ms. Stryker said Mr. Wien's comments would not affect her vote on investment decisions involving Blackstone.
“I never let those things interfere with my decision about an investment,” she said.