Blackstone opening distressed fund to hedge fund clients

The investment behemoth is the latest to embrace private equity-style credit funds as a primary investment structure.

The Blackstone Group will shift its distressed debt capital in its GSO Special Situations Fund, an open-ended hedge fund structure, to closed-end vehicles, giving its investors the opportunity to put their existing capital into a distressed debt fund the New York-based firm is currently raising. 

The hedge fund investors will be given the opportunity to switch their commitments to existing vehicles as well, meaning Blackstone will not lose those assets under management, a source familiar with the matter told Private Debt Investor. 

The transfer of capital can be used for new funds, this person said. There could be broader opportunistic investment mandates along with core distressed transactions like out-of-court workouts and rescue financings. Blackstone is currently in market with a locked-up distressed debt fund that investors could choose to put money into, a market source said. 

“We have decided to transition the investment activities of our hedge fund into our other distressed funds with longer duration, draw down structures,” Blackstone spokeswoman Paula Chirhart said in an email. “These funds better complement our competitive strengths and style of investing and will allow us to generate better risk-adjusted returns for our investors.”

Chirhart declined to comment on the investment mandates and the distressed debt vehicle in market.

Blackstone was not forced to make the decision, the source said, rather the firm decided a locked-up fund is a better fit for “patient capital”.

Jason New and the team that currently oversees GSO Special Situations will continue to oversee the distressed vehicles.

The firm's locked-up funds have returned double-digit internal rates of return, and the distressed hedge fund has posted a single-digit IRR, according to the fourth-quarter earnings presentation.

Aside GSO Capital Solutions, Blackstone's distressed vehicles include its rescue lending funds and distressed energy fund.

The Rescue Lending I fund posted an 11 percent IRR with an investment period that ran from September 2009 to May 2013. Its Rescue Lending II fund returned 18 percent and is still in the middle of its investment period, which began in June 2013 and ends in June 2018.

Its Energy Select Opportunities vehicle reported a 36 percent IRR so far in an investment period lasting from November 2015 to November 2018.

The GSO Special Situations Fund has posted 6.5 percent returns since inception, the source said.

Market sources have repeatedly told PDI there are liquidity risks associated with open-ended funds, as liquid vehicles can be a mismatch for illiquid assets or dealing with volatility in the market.

A locked-up vehicle provides the general partner a guaranteed time period to hold onto the capital rather than worry about investors cashing out as they might on hedge funds, which can often be quarterly, they say.

Among other high-profile firms that turned away from the open-ended model, The Carlyle Group also shut down its hedge funds and said it will put an emphasis on its Global Market Strategies division, which includes its private credit funds, in its quest to add $100 billion in AUM.

“One of our highest strategic priorities is to grow the various components of our direct lending activities,” David Rubenstein, the firm's co-chief executive officer, said on Carlyle's fourth-quarter earnings call last month. “We have recruited some exceptional new people to help grow this business.”

Among those hires is Mark Jenkins, formerly of Canada Pension Plan Investment Board, who joined in September as head of global credit. Ben Schryber, formerly of First Avenue, who joined this month as a managing director to assist in the fundraising process.