When you're the billionaire president of the largest alternative investment fund in the world, it has to be something of a challenge to invest your personal lucre without butting up against some conflict of interest or another. But such is the life of Blackstone President Tony James, who probably can't even hurl a stone without hitting some single-family home Blackstone leases or strip mall it owns.
Yet there are still some arrangements that a guy like James might want to avoid lest they set off investors' stink alarms. Namely: letting your brother invest some of your cash in a firm that your company previously sold, and which subsequently sells itself to another firm your company also co-owns, and at a big profit.
If that sounds complicated, let the Wall Street Journal clear it up for you:
In 2010, a firm called Swift River Investments LLC put money into a software company developed by private-equity giant Blackstone Group. Five years later, a company Blackstone co-owned acquired the software firm, at a price that gave Swift River a fat profit.
Blackstone’s back-and-forth involving Swift River wouldn’t be notable but for one thing: Swift River invests personal wealth for Blackstone’s president and chief operating officer, Hamilton “Tony” James. A brother of his runs it.
If that still sounds complicated, let Blackstone dispel your concerns:
“All of our people are required to clear personal outside investments,” said a Blackstone spokeswoman, Christine Anderson. “We have strict policies and procedures around conflicts and we follow them. Rare conflicts are subject to extensive approvals and disclosure.”
So the fact that Tony James directly profited from the company he runs (1) selling a firm and then (2) buying it (via a portfolio company) five years later at 10 times the original price – well, this might be a conflict, but it was extensively disclosed and approved and anyway, who cares?
Institutional investors do, at least in theory. The Blackstone/Swift affair comes amidst a big WSJ investigation probing the variously conflicted arrangements between big investors and their quickly multiplying family offices. Think of Bill Ackman personally investing in female orgasm startup Sprout before it allowed itself to be swept into the Valeant juggernaut, then the jewel in Pershing Square's crown. Inevitably, people find this sort of thing slightly icky:
“It’s a distraction at best and a conflict at worst,” said Jonathan Grabel, chief investment officer of the $50 billion Los Angeles County Employees Retirement Association. “To the extent we entrust a firm with retirement savings for a large pool of people, it’s not consistent with their fiduciary duty to us as an investor.”
Simply in terms of personal gain, there does seem to be an incentive for hedge funders to seek sweeter deals through their family offices than the companies they manage. There's no two-and-twenty when the only investor is yourself. But we're still awaiting some family-office shenanigans that don't require a three-dimensional flow-chart to understand.