Blackstone’s fundraising machine gets creative

Investors in alternative assets want different things, and that has driven big firms like Blackstone Group to develop new products tailored to specific investors’ desires.

“One big LP wants to invest in African power, we have others that want Asian core real estate,” said Blackstone’s President Tony James on the firm’s first-quarter earnings call. “We’re … much more in business creating special vehicles for LPs that want certain things… There’s much more money coming into separate accounts than in broad commingled funds.”

Blackstone is scaling its business not through old-fashioned, private equity-style vehicles but through new ideas and products, he said.

Getting creative

Make no mistake, Blackstone is a machine when it comes to raising old-fashioned PE funds.

The firm is in market now raising its seventh flagship private equity fund, which is expected to hold a first close on at least $10 billion in the second quarter and has a $17.5 billion hard cap.

But growth is coming from different places, James said. “What’s scaling is the creation of new products around new capabilities,” he said. As an example, he mentioned Blackstone’s recent announced acquisition of the bulk of GE Capital Real Estate.

“We’ll end up with capabilities in Australia and Mexico, teams in those places that we didn’t have before,” he said. “That opens new product opportunities and new fund opportunities.”

One of those new businesses Blackstone is growing is its so-called Tactical Opportunities (TacOpps) group, which chases investments that don’t fit the mandates of the firm’s primary businesses. TacOpps invests across strategies and has targeted opportunities in mortgage loans, shipping opportunities and wealth management.

About $2.4 billion of Blackstone’s $30 billion quarterly fundraising total went to the second generation Tactical Opportunities fund, which is a blend of large separate account vehicles and a commingled fund. The firm has raised $3.1 billion so far for TacOpps Fund II, the firm said in its earnings release. Fund II is targeting between $7 billion and $8 billion, Buyouts previously reported.

The first TacOpps fund raised $5.6 billion and closed in 2012.

Another $2.6 billion of the quarterly fundraising total came through Blackstone’s retail networks in the first quarter, Laurence Tosi, chief financial officer, said on a separate analysts call. He added that the firm has raised about $11 billion through retail over 12 months.

Retail “continues to both surprise us as well as to be a significant contributor,” Tosi said.

“Astonishing”

Blackstone also polished off $14.5 billion for its Blackstone Real Estate Partners Fund VIII as part of its $30 billion in fresh capital in a strong first-quarter fundraising effort.

The firm said Blackstone Real Estate Partners VIII drew a record $15.8 billion in commitments in a few months. Blackstone’s predecessor real estate fund, Fund VII, reported a 1.9x multiple of invested capital and an IRR of 39 percent, as of March 31.

It’s not clear how that overall fundraising total breaks down between commingled vehicles and separate accounts. The firm has $64.5 billion of undrawn capital, according to the earnings report.

Chairman and CEO Stephen Schwarzman described the quarter’s $30 billion fundraising total as “astonishing.”

The fresh capital drove Blackstone’s assets under management to more than $310 billion.

“Despite our significant growth, I do not believe Blackstone is in any way at a long-term peak given the amount of assets we’re managing today and the amount of capital we’re putting in the ground,” Schwarzman said on a conference call with analysts.

In another milestone, Blackstone’s largest buyout fund, the $22 billion Blackstone Capital Partners V from 2006, returned 100 percent of its committed capital as of the end of the first quarter. That fund also has $19 billion of value at current asset levels yet to be realized.

Fund V made $1.8 billion in realizations during the quarter. The IPO of portfolio company Summit Materials helped Fund V appreciate by 12 percent. All told, the fund produced a multiple of invested capital of 1.9x and a net IRR of 11 percent as of March 31.

Steve Gelsi contributed to this report

Photo: Stephen Schwarzman, chairman and chief executive officer of the Blackstone Group, speaks during a session on day one of the World Economic Forum in Davos, Switzerland, on Wednesday, Jan. 28, 2009. Scott Eells/Bloomberg News