Former Merrill Lynch broker Kurt Stein vividly remembers the day in the spring of 2011 when the doors to the exclusive world of private equity seemed to swing wide open. Inside an ornate ballroom at Manhattan’s Waldorf Astoria hotel, Stein and hundreds of his Merrill colleagues were wined and dined by Blackstone, the world’s preeminent buyout firm. The pitch: Blackstone’s vaunted deal machine was invincible, producing net returns north of 15% per year with an uncanny ability to avoid losses.
Here’s how Blackstone’s billionaire cofounder and CEO, Steven Schwarzman, explained his proposition to brokers in 2013: “We are a pair of safe hands. . . . Why would you invest in the products you normally do if you can make two to three times your money and have happier customers if you put them into our products?”
Now Stein, who has since resigned from Merrill and submitted documents to the SEC as a whistleblower, wishes those doors had remained firmly closed. Fast-forward ten years, and most of the clients Stein placed into private equity funds are sitting with annual returns of 10% or less, well below the 15% annually the S&P 500 has returned. Stein now believes these funds were misrepresented by wealth management firms and their private equity partners. (The SEC declined to comment.)
In retrospect it seems Schwarzman was only breaking bread with brokers because these salespeople represented the next big money pot. Private equity had already tapped the bigger money pools—pensions, endowments and sovereign wealth funds. These institutions have more than 20% of their assets in alternatives, compared to less than 5% for individual investors. With affluent households growing rapidly, financial advisors now control $8 trillion. Retail is the biggest driver of growth at $684 billion (assets) Blackstone today, pulling in almost $4 billion in new assets a month. This channel could nearly triple by 2028.
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