Blackstone bulks up credit team as it raises $17 bln in Q1

Blackstone Group said it drew in $17 billion across its private equity, real estate, hedge fund and credit strategies in the first quarter, with the expectation that its third mezzanine fund will close later this year with about $6 billion in commitments.

GSO Capital Opportunities Fund III, the firm’s third mezzanine fund, will surpass the $4 billion raised for Fund II back in 2012, Buyouts initially reported in March. See story.

Tony James, chief operating officer of the New York firm, said Blackstone’s mezzanine fund and other credit strategies will meet a need as regulatory pressure causes traditional banks to pull out of the public debt markets.

“What you’re seeing in the credit market is a technical backup … not reflecting long-term default rates,” James said on a media call. “Liquidity has evaporated in this market. That means companies that need to access debt capital are going to be more dependent on private investors like us.”

When high-yield-debt markets were hot, companies easily raised public debt, but it’s much harder now, he said.

“It’s a great time to be in mezz or a rescue lender,” he said. “You can earn remarkable returns for the risk.”

Blackstone is bulking up its staff to do more in this area, he said.

Blackstone on April 18 named David Flannery senior managing director at GSO. He joined the firm from Anchorage Capital Group. He’ll be heading up East Coast debt investments while David Posnick, senior managing director of GSO, works on the West Coast.

Among other fundraising milestones, Blackstone said Strategic Partners Fund VII drew in $1.8 billion in the quarter and Blackstone Capital Partners VII drew in $899 million.

Blackstone Core Equity Partners gathered $670 million and Blackstone Tactical Opportunities Fund II got $327 million.

The firm’s fifth European opportunities fund notched $5.2 billion in commitments and its third mezzanine real estate debt fund drew in $1.7 billion. Blackstone Real Estate Partners co-investments drew in $842 million and BPP U.S. drew in $555 million.

While funds remain key to Blackstone, James said the firm is seeing sustained demand from larger investors for separately managed accounts.

“Sometimes when we do an SMA – it’s proof of concept and then we build a fund class around that,” James said. Blackstone’s Real Estate Core Plus fund is an example of that trend, he said.

In the face of tough equity markets and debt markets in the first quarter, Blackstone’s economic net income fell 77 percent to $371 million from $1.6 billion in the year-ago period. Much of that drop came from fewer public stock sales given difficult equity markets during the quarter. In recent weeks, however, equities markets have recovered.

All told, Blackstone’s assets under management rose 11 percent to $344 billion. The firm invested $7 billion in the first quarter. Blackstone has returned $48 billion of capital to investors in the past year.

Action Item: Blackstone’s 8-K filing, http://1.usa.gov/1WHOnvx

Photo of Blackstone’s Tony James courtesy of Reuters/Keith Bedford