Blackstone rectifies ‘regret’ with GSO deal

The Blackstone Group’s $930 million (€633 million) acquisition of GSO Capital Partners is several victories for the price of one, according to chairman and chief executive Stephen Schwarzman. The firm is not only purchasing a $10 billion alternative asset manager with good margins and top returns, but reconstructing a piece of its business with a team it has headhunted for nearly a decade, he said during an investor call.

“One regret we have is that we sold BlackRock too early,” Schwarzman said of the asset management division, led by Laurence Fink, that Blackstone spun off in 1992.

Schwarzman said he twice previously tried to hire Bennett Goodman, one of GSO’s three founders, to help make up for the loss.

“In 1999 I attempted to hire Bennett to augment and build out Blackstone’s credit business and frankly we tried again in 2004 when he was leaving [Credit Suisse] First Boston and we failed,” Schwarzman said. “So for me, this is the culmination of a long-term strategy of rebuilding this part of our firm and bringing Bennett and his outstanding team to join us.”

Goodman, Tripp Smith and Doug Ostrover spun out from CSFB in 2004 to avoid conflicts of interest with the bank’s other businesses. Blackstone’s ties to GSO run deep; it was an investor in GSO’s first hedge fund; Blackstone-affiliated placement agent Park Hill Group helped raise two GSO funds; and senior executives at both firms have worked with one another in the past at prior firms, Schwarzman said.

“I personally worked with Bennett and the others closely for more than a decade at DLJ and Credit Suisse,” Tony James, Blackstone’s president, said during the call, noting two firms that merged in 2000. “They are totally culturally compatible with Blackstone.”

GSO, which has 120 employees across offices in New York, London, Los Angeles and Houston, has approximately $4 billion under management in its credit hedge fund, roughly $1 billion in mezzanine capital and approximately $5 billion in CLO vehicles, Bennett told investors during the call. Together with Blackstone’s existing fixed income business, it gives Blackstone a “critical mass with credit fund assets totaling more than $21 billion,” Schwarzman said.

“As with private equity, scale is an advantage and GSO has built its infrastructure to support a much larger business,” Schwarzman added.

James noted that the acquisition is a “tangible example” as to the advantages of being a publicly traded firm. “One reason that Blackstone opted to go public was to provide our fund with currency to enhance our flexibility in pursing strategic development of the business,” he said.

In conjunction with the GSO deal, Blackstone announced a $500 million unit repurchase programme. “It is our current intention to repurchase at least the number of shares equivalent to what we are issuing in conjunction with the GSO transaction, which looks like it will be roughly $300 million,” James said.

Blackstone is paying $620 million in cash and units for GSO, and has agreed to pay an additional $310 million over the next five years, contingent upon certain conditions being met, James said.

Both James and Schwarzman noted that current dislocation in the credit markets makes the acquisition important, as the firm seeks to generate revenue in areas other than large buyouts.

“Setting up new deals of big public to private transactions will be challenging for us until the credit markets reopen,” James said, noting it is difficult to predict when that will occur. “It will probably be at least the third quarter before we begin to earn sizeable upfront transaction revenues.”

The firm has previously experienced slowdowns due to similar market phenomena between 1990 to 1992 and 2001 to 2002, Schwarzman said. “We’re really just reflective of everyone who does private equity investing,” he said. “You always have a significant decrease in realisations [during economic downturns] and then to sort of complete the cycle, those tend to be wonderful times to be actually investing money.”

James said the firm continues to grow its assets, ending last year with a total of $103 billion under management. The number reflects a 4.6 percent growth from the third quarter and a 48 percent year-over increase, he said.

Schwarzman also said, in response to an analyst’s question, that the trouble it encountered securing financing for its failed $1.8 billion deal to purchase PHH, GE’s mortgage and leasing business, does not imply there will be problems with other agreed deals in its pipeline.

“I think those were sort of very specific circumstances around a part of the economy which is in virtual free fall,” Schwarzman said. “This was sort of main street of Nagasaki with a nuclear hit so I don’t see the implications of that in any broader context at all.”

The investor call was the first on which Schwarzman has participated since Blackstone went public last June.