David Blitzer had his eye on Addy Loudiadis’s business at Goldman Sachs Group Inc. for years.
By the middle of 2013, the Blackstone Group LP dealmaker had his shot. Pressured by regulators to boost capital under new rules, the bank started looking for investors to take pieces of Rothesay Life Ltd., the insurer that Loudiadis heads in London. Blitzer, whose private-equity firm historically has to control companies it buys, was fine taking a minority stake in a Goldman cash cow. In October, he struck a $297 million deal to buy 28.5% of Rothesay, with Singapore’s sovereign fund taking an equal share.
Blitzer has spent the past two years engineering unorthodox deals like Rothesay that no one else within Blackstone could do. The 44-year-old New Jersey native runs Tactical Opportunities Group, a $5.6 billion unit with the mandate to make investments that fall between the cracks of the firm’s other businesses. The group has bought oil tankers, developed Brazilian shopping malls, and created a finance unit for U.S. landlords, capitalizing as banks are forced to shrink, and cutting deals that were the domain of Wall Street before its retreat from proprietary investing.
“An awful lot of what Tac Ops does was either done by the big banks on their proprietary trading desks or by hedge funds in their illiquid side pockets,” Tony James, Blackstone’s president, said in an interview last month. “Both those sorts of capital have been eliminated and unless they come back, there will be tons of opportunities.”
Since Blackstone’s billionaire founder Steve Schwarzman drafted Blitzer in 2011 for the newly created role, his group has evaluated more than 500 investments for the world’s largest alternative asset manager, a behemoth overseeing $272 billion across credit, hedge funds, real estate and private equity. In just over two tears, the 30-person unit has exceeded fundraising targets and returns with annual gains near 20%. It could soon grow to $15 billion, says James.
Blitzer can thank New Jersey’s pension fund for his role. He’d returned from an almost decade-long stint running Blackstone’s European private-equity arm in 2011, a business he had started in 2002, and was leading efforts to strike partnerships with its largest investors. Blitzer was also formulating a special-situations group that could capitalize on more of the opportunities that Blackstone sees through its web of businesses.
Around the same time, New Jersey’s head of private equity, Christine Pastore, had approached Blackstone to ask for a discount on fees in exchange for handing over a big chunk of money. New Jersey had invested more than $1 billion in Blackstone funds, including with credit arm GSO Capital Partners LP, and wanted to see if it could lower the 1.5% management fee and 20% charged on profits. The discussion turned to investments that don’t fit into private-equity mandates. Tactical Opportunities was born.
Christopher McDonough, director at New Jersey’s $87 billion investment division, said it differs from special situation funds, which usually target specific opportunities such as distressed debt or real estate, by its size and scope.
“A lot of the time special situations funds focus on one particular aspect of the market,” says McDonough. “We haven’t seen anything of this scale.”
The structure is different from private-equity and also hedge funds, which have the latitude to buy exotic or wide-ranging assets. Blackstone will invest over a period of three years, compared with the five to six years for a buyout fund. Unlike a hedge fund, the money can be locked up for more than 10 years and profits from deals can be recycled back into new opportunities.
The New Jersey deal also includes lower fees, with Blackstone taking a 15% cut of the profit, less than the 20% charged by most private-equity firms.
Blackstone agreed to the terms after New Jersey committed $750 million, and more than $1 billion additionally to other private-equity funds and accounts. Its allocations to Blackstone over the preceding 12 months totaled $2.5 billion, the most in any year by a single investor.
Some of the largest institutional clients followed investing with Blitzer’s group, including the California Public Employees’ Retirement System, Oregon Public Employees Retirement Fund and New York State Common Retirement Fund, which collectively control about $500 billion in assets.
“We are very well suited as a firm to having this pool of capital that plays across the spectrum and can attack opportunities in the marketplace and do it very quickly,” says Blitzer.
James says Blitzer, with his “pied piper” personality, was a natural to head the effort. He’d joined Blackstone from Wharton Business School’s undergraduate program in 1991, six years after Schwarzman and Peter G. Peterson founded the firm to mainly buy companies with borrowed money.
During his time at the firm, Blitzer has helped Blackstone invest in United Biscuits, Allied Waste Industries Inc. and the company that makes soft drink Orangina. Along the way, he’s personally bought stakes in the Philadelphia 76ers basketball team and last year the New Jersey Devils hockey club.
“When you start a new business with no money, no clients and no team, you need a leader, a personality who can bring in employees, clients and companies,” says James.
Blitzer tapped London-based Chad Pike, 43, vice chairman of Blackstone Europe and a former co-head of real estate, to help advise the unit, while Christopher James, 38, who’d worked on the firm’s 2007 initial public offering, took the role of chief operating officer. Blitzer also recruited some of Blackstone’s rising stars, including Jasvinder Khaira, a 33-year-old graduate of the University of California at Berkeley who sports purple and orange turbans. Khaira, like Blitzer, had played multiple roles in Blackstone, including working at GSO, within private equity, and on the IPO.