GSO shops third mezzanine fund with $6 bln target

GSO Capital Partners is in the market, targeting $6 billion for its third mezzanine fund, according to two people with knowledge of the firm.

GSO, an affiliate of Blackstone Group, is targeting April for a first closing on GSO Capital Opportunities Fund III, one of the people said. The firm has not yet set a hard cap on the fund, the person said.

Blackstone did not respond to requests for comment.

The fund will give GSO a large pool of capital to lend into leverage buyouts at a time when traditional banks have pulled back. Limited partners have mixed feelings about mezzanine, which can produce equity-like returns but also take on more risk than other forms of debt. One LP said that only a few big firms like GSO stand out because of the size of checks they can write, which gives them better leverage when negotiating with sponsors.

“There are interesting opportunities for [the biggest funds]. They can write checks for $200 million, $300 million, $500 million for a deal. Given the dislocation in the high-yield market, it’s a good opportunity,” the LP said. “There’s more pricing discipline at the top, and fewer competitors.”

If Fund III hits target, it would not reach the level of Goldman Sachs’s most recent haul for mezzanine. Goldman raised $8 billion for GS Mezzanine Partners VI last year, Reuters reported. However, GSO’s vehicle does not yet have a cap so it could go higher than target.

GSO closed its second mezzanine fund on $4 billion in 2012. That fund was generating a 1.28x total value multiple as of Dec. 31, 2015, according to performance information from the New Jersey Division of Investment. GSO’s first mezzanine fund, which closed on $2 billion, was producing a 1.72x total value multiple as of the same date, according to New Jersey information.

GSO’s mezzanine funds invest in performing companies that need capital. Investments include unitranche debt, second lien, subordinated debt, structured equity and preferred equity.

Fund III will focus on providing capital to upper-middle-market companies and private-equity sponsors for leveraged buyouts, mergers and acquisitions, recapitalizations and growth financing, according to an investment document from the Texas Municipal Retirement System.

It’s not clear who leads the mezzanine strategy at Blackstone. The second mezzanine fund listed co-founders Bennett Goodman, Tripp Smith, and Douglas Ostrover as executives on the fund. Ostrover left GSO last year. He formed credit-focused Owl Rock Capital with former KKR energy and infrastructure chief Marc Lipschultz, Bloomberg reported.

GSO has $79 billion of assets under management. The group has a wide array of products, including about $15.3 billion in mezzanine, $7.2 billion in rescue lending funds, $18.9 billion in CLOs and $15.7 billion in small-cap direct lending funds, according to Blackstone’s website.

Action Item: Check out Blackstone’s website for more info about GSO here: http://bit.ly/1R8ZB6u

Photo of Bennett Goodman courtesy of REUTERS/Phil McCarten