Private Equity Briefcase

December 14, 2007

Marching To A New Drum

Large private equity sponsors and a handful of middle market groups have long been involved in the debt investment business, either through the supplying of mezzanine financing for leveraged buyouts or the purchase of distressed securities in workout situations that are subsequently converted into large equity ownership stakes.

So, it comes as no big surprise that the Blackstone Group has launched a new debt fund with more than $1.3 billion in commitments. The Blackstone Credit Liquidity Partners LP fund was formed, the New York investment group said, “to capitalize on the recent dislocations in the credit markets,” or more specifically, to acquire stuck LBO loans and high yield bonds. The investment fund will not purchase distressed or defaulted debt, a buyout market source says, but will focus on “stressed” debt that simply may be trading down as little as five points.

Blackstone didn’t market the new vehicle to an external group of investors. Instead, it sent out a private placement memorandum to its existing base of roughly 300 limited partners via email in September. Commitments to the fund were hammered out in a subsequent conference call that raised the bulk of capital for the fund by November, a source says. The Park Hill Group assisted with the effort.

Blackstone, meanwhile, isn’t a stranger to the business, having launched its corporate debt business eight years ago which now encompasses $9.2 billion in assets and staffs around 31 investment professionals. The group oversees 11 CDO vehicles, comprised of $4.7 billion of seven US funds and four European CDO funds amounting to $2.9 billion, augmenting its two mezzanine investment funds totaling $2.1 billion. It launched a senior debt lending effort in 2002.

Among deals the firm’s mezzanine operation has funded include the leveraged recapitalization of legendary firearms maker Colt Defense in July. Blackstone sponsored the transaction in July 2007, a deal that slid largely under the media radar and allowed the maker of the Colt M-4 rifle—the successor to the M-16 used by military and law enforcement personnel—and its private equity backer Sciens Capital Partners to recapitalize the business with $191 million in senior bank and mezzanine financing.

Its latest credit-focused fund puts Blackstone in company with other top tier private equity houses seeking to take advantage of hung bank financings related to LBO’s. TPG, the Fort Worth, Texas-based powerhouse teamed up with hedge fund manager GSO Capital in September to launch a roughly $1 billion fund, one knowledgeable source says, to purchase leveraged buyout-related debt. Merrill Lynch, incidentally, also got into the game indirectly when it acquired a minority stake in GSO, which is run by a trio of former Credit Suisse leveraged finance heavyweights, for an undisclosed sum over the summer.

Kohlberg Kravis Roberts, meanwhile, is said to be working with Citigroup on a similar, if not novel, effort with the New York buyout group seeking to buy debt from its own buyouts arranged by Citigroup.

Given the leveraged loan market is still working through a backlog of deals, making financing harder than ever to obtain for new buyouts, it’s no wonder ever-opportunistic large financial sponsors like Blackstone are looking to extract returns from alternative sources of capital and, thus, are marching to the new debt-investment drum.