Physical commodity assets 'inconsistent' with Blackstone model: executive

NEW YORK Fri Jan 31, 2014 8:54am EST

People walk by the JP Morgan & Chase Co. building in New York October 24, 2013. REUTERS/Eric Thayer

People walk by the JP Morgan & Chase Co. building in New York October 24, 2013.

Credit: Reuters/Eric Thayer

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NEW YORK (Reuters) - Blackstone Group's (BX.N) 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) 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) sold the bulk of its physical oil business to Rosneft in December.

Blackstone is up against Australian bank Macquarie Group Ltd (MQG.AX) 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.

(This story was corrected to clarify that James spoke to reporters, not analysts)

(Reporting by Josephine Mason and Anna Sussman; Editing by Lisa Shumaker)

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