When Saudi Arabia pledged as much as $20 billion to help Blackstone Group LP build the world's largest infrastructure fund, the kingdom wanted to be rewarded for its unprecedented commitment.
One way Blackstone agreed to do just that: For every dollar that any other investor pays the asset manager to oversee its cash, Saudi Arabia gets to pay 15 cents less. That fee discount — linked to a portion of revenue from other investors — is just one of the breaks the sovereign wealth fund won last year as Blackstone set out to amass a record $40 billion war chest, according to terms reviewed by Bloomberg and described by people with knowledge of the deal. In exchange, the Saudis will match other investors' deposits in the fund.
The infrastructure fund has been a source of Wall Street fascination since it was unveiled during a visit to Riyadh by CEO Stephen Schwarzman and President Donald Trump in May 2017. Since inception, other potential investors have wondered how Blackstone would balance their interests with those of the Saudis, given the latter's outsize stake, people with knowledge of the matter have said.
Now, investing alongside the Saudis is even more fraught, after the killing of a U.S.-based journalist critical of Crown Prince Mohammed bin Salman's regime ignited a geopolitical storm this month.
The terms seen by Bloomberg show that Blackstone made a variety of concessions, the majority of which have remained outside the public's view. They include lower management and incentive fees for the Saudis, as well as additional discounts based on a percentage of the revenue the fund generates from its other investors. Of those, the largest so far is the $56.7 billion Pennsylvania Public School Employees' Retirement System, Harrisburg, according to data compiled by Bloomberg.
Saudi Arabia's Public Investment Fund also negotiated certain rights and provisions. Blackstone will "consult with and consider opinions" of PIF on deals that might require a review by the Committee on Foreign Investment in the U.S., potentially letting the kingdom abstain from some transactions, according to one of the documents reviewed. PIF also won a more limited break on fees for future investments in other Blackstone funds.
"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.
"Blackstone's ability to exclude an LP from an investment that presents a regulatory impediment is standard across all of our funds," Blackstone further said. "Where there are potential CFIUS reviews, we have a responsibility (and practical necessity) to engage with large non-U.S. investors in our funds in order to ensure fully compliant CFIUS filings."
The Saudi fund didn’t respond to messages seeking comment. The Pennsylvania retirement system declined to comment.
By the end of September, the infrastructure fund had raised $2.5 billion from outside sources, shy of expectations. The size of PIF's stake has given some potential investors pause because of concern that the kingdom could try to use its clout to influence how money is deployed, people with knowledge of the matter have said.
"We retain sole investment discretion, and no third party has the ability to influence any investment decision," Blackstone said.
The death of journalist Jamal Khashoggi has led prominent business leaders including Blackstone's Mr. Schwarzman to cancel visits to Saudi Arabia, and a few have halted deals with the government. France demanded more information, while Germany put arms sales to the oil-rich nation on hold. Some U.S. politicians are looking for more ways to punish the Middle Eastern country, which has shifted its account and now says the journalist was killed when an argument escalated into violence.
Blackstone President Jon Gray acknowledged the tensions on a conference call to discuss his company's quarterly earnings Thursday, while signaling it will push ahead with the infrastructure fund.
"Like everybody, we've been concerned about what we've been reading the last couple weeks," he said. "We take a long-term approach both to our relationships and to building businesses."
During negotiations to set up the fund, PIF initially sought partial ownership of the vehicle, according to the people familiar with the talks. That request was rebuffed by Blackstone. Instead, the parties worked out the structure that gives the Saudis a discount tied to revenue that Blackstone generates from all of the fund's other investors through management fees and incentive fees.
Under a formula that hasn't previously been reported, the costs borne by Saudi Arabia's sovereign wealth fund will start at a lower level than for other investors and decline as more commit capital to the fund. In part, that's because of a key provision: Within a few years, the Saudis will see their costs drop by an amount equal to 15% of the management fees and carry collected by Blackstone from other investors. The concept is referred to as "revenue sharing" in the documents seen by Bloomberg.
"This is simply a discount mechanism to reduce net fees as the fund grows and as PIF commits additional capital," Blackstone said.
Documents show PIF will have only one board seat on the fund's so-called limited partner advisory committee, the same benefit afforded to other investors who are writing substantially smaller checks.
Blackstone stands to reap significant and steady income from the infrastructure fund. If the pool reaches its $40 billion goal, the roughly 97 basis-point management fee collectively borne by non-PIF investors would generate more than $190 million in annual revenue for Blackstone. Each non-PIF investor may be subject to differing terms.
To be sure, it's not unheard of for investors who make early or sizable commitments to seek special terms.
The Pennsylvania retirement fund was given a discount for its relatively early $500 million contribution. According to public filings, it will pay a 75 basis-point management fee the first two years and a 90 basis-point fee after that. Like other investors, it's also on the hook for a 12.5% incentive fee, which is calculated based on the fund's profits.
The fee setup for Saudi Arabia's PIF is sweeter. It will pay a 75 basis-point management fee on its first $10 billion commitment, and 65 basis points on its second $10 billion. Its incentive fee is lower, at 10%.
It also gets an additional break when the investment fund reaches the two-year mark: Blackstone will lower the costs borne by the Saudis by an amount equal to 15% of the fee revenue generated from other investors.