Blackstone Launches $750M Mezzanine Fund –

The Blackstone Group this month began raising a debut mezzanine fund with a target of $750 million that will invest primarily in non-Blackstone deals.

The firm also has snapped up five private equity professionals from troubled Nomura Holding America Inc. to run a new mezzanine group, according to Howard Gellis, a Blackstone managing director and the group’s co-chairman.

Blackstone’s foray into mezzanine financing follows similar initiatives by private equity groups like Thomas H. Lee Co. and GTCR Golder Rauner, which are seeking to diversify into an asset class that thrives when traditional debt markets falter.

An industry source said Blackstone had been considering raising a mezzanine fund since the mid-1990s, when a large public pension approached the firm with a request for a private equity vehicle that incorporated less risk and lower returns than traditional buyout funds. Last year’s credit market freeze, and the subsequent scramble for mezzanine financing by private equity firms, convinced the directors of Blackstone the time was right to create a separate mezzanine finance group and launch a fund.

Approximately 12% of the new fund will be capital committed by Blackstone partners. American International Group, which holds a 7% stake in Blackstone (BUYOUTS Aug. 31, 1998, p. 4), already has committed $150 million.

The fund will invest mostly in outside deals, including growth financings for under-capitalized public companies. The fund has a provision which allows it to invest in Blackstone deals only if a co-investor takes a 20% position in the company being acquired.

Nomura’s Loss Proves Blackstone’s Gain

Blackstone has added three new managing directors and two associates to run the new mezzanine group. The managing directors are Mr. Gellis, Salvatore Gentile and Jason Drattell. The five came over to Blackstone from Nomura when the Japanese firm decided last fall to shut down its troubled proprietary investment activities in the U.S., Mr. Gellis said.

Mr. Gellis and his group had worked for Nomura’s leveraged capital group. Prior to 1994, Mr. Gellis was head of mezzanine activities at Alliance Capital Management, which he joined in 1987.

There is a need for mezzanine financing in today’s debt markets, Mr. Gellis said, because there is a disconnect between the multiples banks will lend on and the exorbitant multiples for which companies currently are being sold. The ensuing gap must either be filled with more equity or mezzanine debt, he said. In addition, high-yield debt often is not available for middle-market deals because most financial institutions prefer to issue junk bonds in excess of $100 million, he said.

Other private equity groups recently have launched their own mezzanine efforts. Thomas H. Lee Co. launched its own mezzanine fund early this year with a target of $1 billion (BUYOUTS Jan. 25, p. 1). However, the fund will only invest in Thomas H. Lee deals. Similarly, GTCR in February launched a $400 million mezzanine fund that will only invest in GTCR deals (BUYOUTS Feb. 8, p. 4).

Blackstone incrementally has increased its franchise to include principal investing, mergers and acquisition advising, restructuring and reorganization advising, real estate investing, alternative asset management and now mezzanine financing. The firm currently is considering an international fund, according to an industry source, although partners at Blackstone declined to comment.