Blackstone Will Raise Year’s Largest & Most Underwhelming Fund

The Blackstone Group has been the tortoise of private equity fundraising — slow, steady and winning. Now, however, the last part of that fiscal trinity is in question.

Blackstone yesterday sent a letter to its limited partners, saying that it would hold a final close on its sixth global buyout fund at, or around, the end of Q2. The firm also said the vehicle had secured approximately $9 billion in commitments to date.

News of the letter was first reported by Private Equity Insider, and has since been confirmed by peHUB.

Why is the letter notable? Because it basically confirms that Blackstone won’t get anywhere close to the $20 billion it wanted when it began fundraising in October 2007 (a predecessor fund closed a few months earlier on $21.7 billion). Blackstone also is unlikely to hit its downwardly-revised $15 billion target, considering that it’s only raised around $1.1 billion over the past 17 months (and virtually nothing over the past two quarters).

On the one hand, such stagnation isn’t surprising. The institutional investor market has been pretty dark since the financial bubble burst in late 2008, particularly when it comes to supporting mega-LBO funds (see here). After all, it’s not a coincidence that Henry Kravis — whose firm is raising a new fund this year — seems to have recently graduated from the Jon Gosselin School of Media Availability.

But there was reason to believe that Blackstone had an ace or two up its sleeve. During a quarterly media call in early August, I asked firm president Tony James if the credit crunch meant his firm no longer needed $15 billion to $20 billion in fund capital. He replied: “We feel there is plenty of opportunity for a fund well into the teens. We probably won’t get to $21 billion, but well into the teens…”

Call me naive, but I assumed James knew something the rest of us didn’t. After all, why not tamp down expectations by saying something like: “A $10 billion fund would certainly suffice, but we may take a bit more to give us flexibility.” Or just accept my premise about recalibrating to meet downsized market conditions.

Maybe Blackstone has got an SWF ready to commit $500 million — or a few public pensions ready to come in from the cold — but chances are Blackstone will raise both the year’s largest and most underwhelming fund (really quite the feat).

For most firms, such a let-down would simply be a PR hiccup that gets briefly batted around by hacks like yours truly. But Blackstone is a public company, and fund-related fees account for a goodly portion of revenue. We’re talking hundreds of millions of “lost” annual revenue, and more once “lost” carried interest is taken into account.

I’ve not seen any mention of this issue in recent research reports on BX (here’s a recent one from BoA Merrill Lynch), but have left messages with a few analysts to get feedback. Will update this post if/when they respond.

A Blackstone Group spokesman declined to discuss fundraising.

It’s also worth briefly noting the “timing” aspect of the letter. I’m told that Blackstone’s decision to end fundraising around June 30 is because that’s when the firm believes it will have burned through most of its Fund V dry powder (based on the expected sizes of some upcoming transaction).