Physical commodity assets ‘inconsistent’ with Blackstone model: executive

February 2, 2014 Leave a comment

Physical commodity assets ‘inconsistent’ with Blackstone model: executive

8:54am EST

NEW YORK (Reuters) – Blackstone Group’s (BX.N: Quote,Profile, Research, Stock Buzz) asset-light model may not fit with the potentially risky, capital-intensive business of trading physical commodities, a top executive said on Thursday, in comments that seemed to jar with its interest in the industry.

Blackstone is one of three finalists in the running to buy JPMorgan Chase & Co’s (JPM.N: Quote, Profile, Research,Stock Buzz) physical commodity division, which includes metals warehouses, a large global oil trading group and gas and power deals. A final decision is expected within days, industry sources have said.

Blackstone President Tony James did not directly discuss the JPMorgan business, one of the biggest raw material operations on Wall Street, but in a call with reporters offered rare insight into the world’s largest alternative asset manager’s thinking three years after it first started looking at diversifying its revenue by getting into commodities.

“Our business is to manage other people’s capital and most of the successful commodities businesses are firms that are based around having a strong presence in physical assets and a lot of infrastructure. That provides some other asset management or trading opportunities but you’ve got to be able to build the business up,” he said.

“That is inconsistent with the asset-light asset manager model that we have.”

His comments also touched on challenges that have pushed some of Wall Street’s biggest banks to retreat from the industry amid razor-thin margins, rising capital costs and unprecedented regulatory scrutiny.

“I can’t see us having a vast balance sheet with lots of assets on our balance sheet. It’s just not the way we are,” he said.

“If you are in the physical commodities business and you have oil spills and stuff like this, it’s complex, so we are trying to figure out – is there a strategy that is a winning strategy in commodities that is compatible with us and what we do well. I don’t think we have got that figured out just yet.”

JPMorgan put the commodities business up for sale last July, while Morgan Stanley (MS.N: Quote, Profile,Research, Stock Buzz) sold the bulk of its physical oil business to Rosneft in December.

Blackstone is up against Australian bank Macquarie Group Ltd (MQG.AX: Quote, Profile, Research, Stock Buzz) and Mercuria, the Swiss-based oil trader.

The three bidders have never publicly commented on their participation in the seven-month process. JPMorgan declined to comment.

Some analysts said James’ candid comments on the potential hurdles also underscore how its rival bidders may be a more logical and natural fit for the business.

“It is a big move away from Blackstone’s core businesses,” said Kris Tremaine, a longtime commodities trader and managing director of Kimura, a commodities trade finance fund set to launch later this year.

Macquarie has the deep pockets and roots in mining, agriculture and energy, while Mercuria has ambitions to expand further into commodities and industry know-how.

Neither would be under the regulatory glare that has pushed JPMorgan to exit the business.

 

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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