Appealing to LPs

Much of the ink spilled over last week’s earnings reports by Fortress Investment Group and The Blackstone Group focused, as expected, on the large losses both firms posted amid a difficult second quarter for the buyout industry.

Fortress, whose public float in February of last year fetched the multi-strategy firm more than $600 million in fresh capital, reported a net loss of $55 million for the second quarter. Meanwhile, Blackstone reported a loss of $156.5 million, its poorest performance since its highly-publicised IPO last summer.

But beyond making easy headline fodder, the earnings calls provided a rare window into how both firms, and the buyout world in general, are responding to a trend more distressing than poor profit figures – a slower fundraising pace.

Although Fortress grew its total assets under management by 23 percent from July 2007, new capital devoted to the firm’s private equity franchise dropped 71 percent, or roughly $4 billion from a year ago.
Limited partners’ tepid reaction to Blackstone’s latest funds were also apparent in its earnings report.

Although an imperfect measure of fundraising, the firm’s total assets under management were $119.41 billion, down from $113.53 billion last quarter, its second smallest quarterly jump since the firm made its public debut.

So how are Fortress and Blackstone responding to weakening LP appetite for their funds? Both firms’ earnings calls show that they are offering what’s most en vogue among institutional investors – credit, cleantech, and car parks.

In other words, funds targeting infrastructure, green technology and distressed credit assets have drawn increasing commitments from major LPs including The California Public Employees’ Retirement System and the Oregon Investment Council.   

Wesley Edens, Fortress chief executive and founder, said during a call with shareholders that he is steering the firm headlong towards a space Fortress already knows well: the debt and credit markets. He said the firm is raising a $2.5 billion private equity-style fund focusing on “credit sensitive assets”.

Blackstone, which has also been very active in the debt space lately through its hedge fund affiliate GSO Capital, revealed during its earnings call that the firm had also made its first forays into the other two hottest fundraising sectors, which are already being targeted by rivals including The Carlyle Group and Kohlberg Kravis Roberts.

Blackstone has launched respective teams for and is raising a US and European developed infrastructure fund, as well as a separate fund for investment in cleantech and renewable energies.

It remains to be seen whether limited partners will respond to the new Fortress and Blackstone vehicles with as much unbridled enthusiasm as they have for other firm’s similar funds. Only time, and earnings sheets, will tell.