Blackstone finds the bright side of conflicts

August 12, 2010

Caveat emptor won’t apply much in Blackstone’s latest deal. The firm’s advisory team was hired to sell U.S. fabric maker Polymer Group. Now, one of its private equity funds has emerged as the most likely buyer of the $450 million company. It’s the kind of situation that earned Goldman Sachs a spanking in the past. But so long as Polymer and Blackstone come clean about how events transpired, everyone should wind up happy.

Banks are more likely to find themselves in this kind of entanglement than private equity firms. Goldman, above all, has struggled periodically to manage such conflicts of interest. The firm’s British team received a famous “spank from Hank” — then Goldman-boss Paulson — amid an outcry it had not put clients first after its investment arm became a suitor for several publicly traded companies, including airports operator BAA.

The Polymer situation sounds far less sticky for Blackstone. Still, investors on both sides could be forgiven for seeking reassurances. Polymer’s minority shareholders need to know that Blackstone worked hard to find a buyer and that its bid provides optimal value — and is preferable to keeping the company independent. Limited partners in Blackstone’s fund will want to be convinced of the investment logic and satisfied the deal isn’t just a way to bail the firm’s advisory side out of a busted auction.

That concern is especially acute given that Polymer’s controlling shareholder is another buyout shop, MatlinPatterson. With credit still thawing slowly and equity markets fickle, private equity firms have struggled to get deals done. Instead, they’ve bought and sold portfolio companies from each other to generate fees and return cash to investors.

Early signs are at least encouraging. Blackstone hadn’t planned to enter the auction, a person close to the deal says, but Polymer wanted the firm as a suitor because of its track record in chemicals. And Polymer’s board has hired another firm to evaluate the deal. Stranger things have happened in the name of greed, but it’s hard to imagine Blackstone boss Steve Schwarzman jeopardizing his firm’s reputation over a few hundred million dollars.

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