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“We’re a Big Mid-Market Fund” and Other Head-Scratchers From the Blackstone’s Earnings Call

Following Dan’s liveblog of this morning’s Blackstone Q2 earnings call for media, I sat in on the much longer analyst call. Even though Blackstone’s improved performance last quarter blew analyst’s expectations out of the water (despite reporting a loss), I hung up scratching my head at a few of the statements from CEO Steve Schwarzman and COO Tony James.

For example—did you know Blackstone was a middle market firm? They’ve been saying this for a while now (at least, since the mega-market died), and today Schwarzman emphasized it again in his opening remarks:

Debt financing remains scarce but we can still get funding for good companies and middle market companies generally, which is our sweet spot.

Later, James echoed that sentiment while he distinguished Blackstone from other mega-firms.

We’re different than the other mega-funds because we’ve always focused on the medium-sized deals. Mid-market deals, that’s where we can bring the proprietary deal flow, operating expertise, (other private equity clichés that I missed), so our position is a little unique there. It’s a big, mid-market fund.

Interesting. It makes sense that the firm would adapt after the credit crunch rendered its strategy impossible, and that may be what they’re telling new investors in BCP VI. However, I have a hard time believing investors in Blackstone’s prior fund, BCP V, which has $6 billion left to deploy, signed up for middle market deals. Furthermore, does Blackstone really have the capacity to manage a portfolio with five times as many companies (since its doing deals that are five times as small as it normally would)? The specter of lowering fund size didn’t come up in this call, but in the media call James suggested the fund would seek “well into the teens” of billions of dollars for the sixth fund, which would make it smaller than the prior fund but still the largest “middle market” fund I’ve ever encountered.

Schwarzman and James emphasized a “we’re special” message, pointing out that other firms may be dealing with issues such as LP defaults, fundraising difficulties, or pressure from LPs on fees and carry, but Blackstone is uniquely unaffected by these situations. An analyst made matters worse by tossing out the softest softball question I’ve ever heard on an earnings call:

Do you think Blackstone is one of a small handful of firms that can raise a general buyout fund?

Naturally Schwarzman and James were up to the task of pontificating on Blackstone’s greatness. My mind began to wander about four minutes into their answers but I think I heard something to the effect of “Every morning I wake up and piss excellence.”

Joking aside, there was some market commentary that I found insightful:

  • Like many large buyout firms, Blackstone is working with lenders to extend debt maturities as a way to brace itself for 2013, when a deluge of buyout-related debt comes due. Schwarzman said the firm has retired or extended more than $10 billion worth of debt this year. James said that, in general, banks have been happy to “kick the can down the road,” because its cutting back on the number of distressed situations that turn to bankruptcy. This is why there hasn’t been a hurricane of buyout-backed bankruptcies like we all predicted.
  • The firm plans to be ready to take several companies public in 2010, markets willing.
  • Schwarzman said he thinks Blackstone’s product mix will be a major beneficiary of institutional investors allocation adjustments down the line:

People who are illiquid aren’t looking to become more illiquid with alternatives. But as liquidity starts improving, they are saying they have to get with higher yielding assets like alternatives.

He added that investors are taking a more active account management role and would rather invest more directly in alternative funds than in other types of funds because “they have more control over their destiny.”

  • Regarding the return of credit, Schwarzman said bank lenders have not increased their appetite for buyouts, and that won’t change until companies make more progress through economic distress, which could be a year or two.
  • Schwarzman said a majority of Blackstone’s companies have performed twice as well as companies on the S&P index, which is “one of the things that makes private equity so special.” That, and carried interest.