Big numbers: Stephen Schwarzman's $25M Abington gift and his firm's $300M+ in fees and profits from Pa. school pensions
Blackstone paid Schwarzman $125 million last year alone. Since 2006, Blackstone has collected more than $300 million in fees and "partnership sharing" from Pennsylvania's public school employees' pension fund (PSERS).
When Abington High School leaders planned costly additions recently, they turned to Stephen A. Schwarzman. The billionaire cofounder, chief executive, and controlling owner of Blackstone Group LP, a corporate-buyout and real estate investment firm, Schwarzman helped the school in 2005 fund its sports stadium, which is named for him.
Schwarzman didn't disappoint: In February, he pledged $25 million to his alma mater, where he was a varsity letter athlete and student council president. He graduated in 1965 before heading to Yale, Harvard (M.B.A.), Lehman Bros., and a long career buying and selling property, companies, and debts.
Schwarzman's firm, which invests more than $400 billion for clients around the world, has prospered in Pennsylvania, among other states. Since 2006, Blackstone has collected more than $300 million in fees and "partnership sharing" from the Public School Employees' Retirement System (PSERS), which funds pensions for staff in Abington, Philadelphia, and more than 500 other school districts. It also invests for the Pennsylvania State Employees' Retirement System (SERS) and for the chronically underfunded New Jersey and Philadelphia pension funds, which send cash to Blackstone and other private high-fee firms in hope of raising returns.
It's common for companies to give charitably in places where they do business. But Schwarzman isn't backing Abington because he feels he owes Pennsylvania anything, spokeswoman Christine Anderson says: "Steve's relationship with and loyalty to Abington High School predates any Blackstone relationship and has nothing to do with Blackstone's business. He credits much of his success to the strong start he received at Abington, and, when asked, he was proud to support the school and its students for that reason and that reason only."
Blackstone paid Schwarzman $125 million last year alone. (Plus $661 million in Blackstone dividends, Bloomberg reports here.) He owns an $8 billion stake in the company, and ranks among the 40 richest Americans on the Forbes 400 list.
What has Blackstone done for its Pennsylvania clients? PSERS, funded by Pennsylvania state and local property taxpayers and deductions from school workers' paychecks, has invested $1.6 billion with Blackstone since 2006, and received $1.8 billion back; it hopes eventually to collect $900 million more as Blackstone sells off its investments, and plans to invest hundreds of millions more.
Counting those future estimated payments it hasn't yet received, PSERS posts an aggregate average yearly "internal rate of return" of around 13.2 percent for its Blackstone investments — which is "very good" as fund groups go, says PSERS spokeswoman Evelyn Williams. That's above PSERS's overall long-term investment target, but also a couple of percentage points below what investments in, for example, the Vanguard Standard & Poor's 500 stock index fund realized from the end of the 2009 market crash through the end of last year. Both return rates are net of fees, which are much higher for private-investment funds such as Blackstone's than for stock-index investments.
In January, PSERS agreed to invest up to $500 million in Blackstone Infrastructure Partners, which, if it can persuade Saudi Arabia and other big funds to join, would finance upgrades to highways and energy utilities. Schwarzman has served as one of President Trump's top advisers on U.S. infrastructure projects.
The state workers' pension system, SERS, began investing with Blackstone earlier — at the end of the 1990s, recalled then-SERS chairman Nicholas Maiale. "Schwarzman came to see me, with [cofounder] Pete Peterson and David Stockman," another Blackstone partner who had been President Ronald Reagan's budget director.
Maiale said he got along well with Schwarzman, though he notes he wasn't invited to what he called the cofounder's "extravagant" 60th birthday party in 2007, where the singer Rod Stewart performed for the future President Trump and other Schwarzman friends; or his 70th bash at his home near Trump's Mar-a-Lago estate in Florida last year, where Gwen Stefani performed for guests including Trump's daughter, Ivanka, and son-in-law, Jared Kushner, along with Trump allies Steve Mnuchin of Goldman Sachs (now Treasury secretary), billionaire investor Wilbur Ross (now secretary of commerce), and Elaine Chao (now transportation secretary).
SERS invested $457 million in four Blackstone buyout funds and three real estate funds in 2000 to 2011, and has so far collected $747 million on those investments. Generally, Blackstone funds "were good performers," Maiale said. SERS, like PSERS, plans to invest more with Blackstone.
But Maiale regrets SERS's $750 million 2004 bet on a Blackstone hedge fund strategy. ("Does money grow best in the dark?" I asked about SERS' hedge-fund investments at that time.) "Part of the sell was, they'd be, like, a hedge when the market went down. But they really weren't," Maiale told me. The Blackstone "hedges" went down with the stock market; SERS assets shrank, boosting its cost to taxpayers. "I soured on them by the end," Maiale said.
SERS has directly paid Blackstone about $10 million a year in each of the last five years to manage investments. That doesn't count millions more that Blackstone has collected in "carried interest" — the same practice that the teachers' fund, PSERS, calls "profit sharing" — which includes a slice of investment profits.
For those "shared" profits, Schwarzman and his partners pay a lower tax rate than what Americans pay on regular income because, under U.S. tax rules, this isn't considered income but interest on investments. These profits that Blackstone kept from state investments account for $195 million of the $308 million that the firm collected for managing PSERS money from 2006 through 2017; the rest was fees that PSERS paid Blackstone directly. Philadelphia says it has paid Blackstone about $2.2 million in fees, while Blackstone has collected $10.4 million in "carried interest" from city investments, and expects more.
In contrast with the school and city funds, SERS declined to discuss Blackstone's share of its investment profits. Spokeswoman Pamela Hile said disclosure could be "detrimental" to fee negotiations.
During the financial crisis, Blackstone helped the pension system, Maiale says, by accelerating a scheduled cash payment after a different SERS investment strategy — investment "swaps" — created massive depletions. Those swaps were supposed to magnify gains but ended up accelerating losses.
Schwarzman and his firm have made larger gifts than the Abington grant, including $100 million to the New York Public Library, which renamed its Fifth Avenue branch in Schwarzman's honor. In 2013, the founder gave $150 million to start the Schwarzman Scholars program at Tsinghua University, Beijing, as a kind of Asian Rhodes Scholarship. In 2015, he donated $150 million to Yale to build a student center, which the school is naming for him. As my colleagues William Bender and Kathy Boccella chronicled, Abington school leaders proposed renaming Schwarzman's old high school in his honor, but reneged after more than 1,000 people signed a Change.org petition objecting.
Blackstone's day-to-day job — the source of its billionaire fortunes, client profits, and charity gifts — is to buy companies and properties at bargain prices, reorganize them to boost sales or cut costs, collect available cash, and sell at a profit that justifies tying up investors' money for years in illiquid funds. Locally, Blackstone has invested in companies as large as West Conshohocken-based AlliedBarton, the nation's largest private security guard company, which Blackstone sold to France-based Wendel for $1.7 billion (debt and equity) in 2016; as diverse as the former SunGard Data Systems, once the Philadelphia area's most promising financial-software company, which enriched Blackstone and its partner firms as they cut costs and spun off units; and as small as Center City-based software developer Cloudamize, which a larger Blackstone-controlled firm bought for several million dollars last year.
Collectively, these deals have inspired pension funds and other clients with hope of beating the public markets — and made billionaires of Schwarzman and other fund bosses, with plenty to give the institutions they support.