Breaking Down Blackstone

Last week, a generous reader sent over materials from The Blackstone Group’s annual meeting, which took place in mid-May at The Waldorf Astoria. Goes without saying that he/she is currently my favorite reader…

More than 100 pages of performance, predictions, posturing and (a bit of) prostrating. Rather than try to weave it all into a confused narrative, my plan is to just run through what I consider to be the most interesting items:

– On the current economic conditions: “No one working today has seen anything like this… More depression than recession… Visibility is extraordinarily limited. It is a time for caution… The survivors, even if they sit on the sidelines a little too long, will have a period of fantastic investment opportunities as we recover.”

“When things do turn, we will be rapid committers of capital, similar to 2003 and 2004. Until then, we will be very cautious exposing LPs’ capital, with the exception of purchasing debt at significant discounts.”

“Since 2000, Blackstone has used placement agents to raise ~14% of the total capital raised for its private equity funds. In situations where we used a placement agent, affected LPs are notified of the identity of and compensation to such agents.” Materials also include a testimonial on behalf of legit placement agents, from someone who recently used Blackstone unit Park Hill Group to raise an inaugural real estate PE fund. More GPs should write such letters, and make ’em public.

– “You almost never screw up by replacing a CEO, but keeping a weak one can be devastating.”

– Fundraising: Blackstone reported that it had raised $8.6 billion for its sixth global buyout fund (BCP VI), including a $500 million minimum commitment from the general partner. It subsequently held a June 1 close on between $400 million and $500 million (only “anticipated” in docs, but later confirmed via a source).

– Blackstone had $6 billion in available capital in BCP V, and plans to begin investing the sixth fund in the first half of 2010. Of that $6 billion, between $1.5b and $2b will be used for debt repurchases.

– Potential Clawbacks: $111.8m on BVP V ($22.4m in escrow); $71.3m in Blackstone Communications Partners ($18.5m in escrow). No potential clawbacks on BCP II, BCP III and BCP IV.

– BX participation in 25 largest LBOs: 16% in 2005, 24% in 2006 and 4% in 2007.

– Interesting that BX spends a god deal of time discussing income inequality.

– Blackstone’s entire 2008 loss from its private equity portfolio was unrealized.

– Blackstone will recognize a 1.37x MOIC and 16.3% gross IRR on the sale of Stiefel Labs to GSK. The firm acquired an 18.8% stake in Stiefel in August 2007, and wrote down the deal’s MOIC to 0.7x at the end of 2008.

– The firm’s group purchasing program for healthcare was formed last year, and its 2009 annual savings are projected at $50 million. The Year 3 projection is $150 million. Currently enrolls 93k employees across 23 portfolio companies, including Hilton, Biomet and Orbitz. Portfolio companies can remain in program after Blackstone has exited its investment. Blackstone will soon expand the program to include 15 ancillary benefits, including dental insurance, COBRA administration and life insurance.

– The majority of Blackstone’s portfolio companies don’t have covenants (excluding publics, devcos and debt portfolios). More than 80% of Blackstone’s total portfolio debt matures in 2013 or later ($34.8b due in 2013, $16.8b in 2014, just $4.1b 2009-2012).

– Completely wrote off $130m purchase of a Deutsche Bank debt portfolio, and was holding a $100m purchase of a Citi debt portfolio at 30% as of 12/31/08. Both purchases occured in April 2008.

– Blackstone’s largest-ever equity check was in the Hilton Hotels buyout. Its $1.44 billion investment was marked down by 48.68% as of 12/31/08.

– Firm wrote two other $1b+ checks: Freescale (marked down by 85%) and Biomet (marked down by 9.96%).

– SunGard was being held at cost (investment split between two funds).

– Two partially realized BCP V investments: Center Parcs (31.5% IRR) and Travelport (58.1% IRR). Combined equity checks of $1 billion.

– What We Got Wrong:

  • We expected a normal recession, not a collapse;
  • We expected tighter credit, not failure of our financial system;
  • We forgot some lessons of the past;
  • We let the continuing ebullient activity around us undercut our resolve;
  • We made too many new investments.

– Six themes driving new investments:

  • Mid-sized, value-oriented businesses;
  • Investing in new or undercapitalized financials;
  • Rescue financings and distressed debt; ;
  • Asian growth investments;
  • Corporate partnerships;
  • Cyclical rebound.