Blackstone remains optimistic about credit despite 2018 AUM losses

The firm’s credit branch exited the bulk of its direct lending assets after ending its sub-advisory relationship with FS Investments’ BDCs.

Blackstone chief financial officer Michael Chae expressed a positive outlook for credit in 2019 on the firm’s fourth-quarter earnings call, despite the firm’s credit AUM losses during 2018.

Blackstone’s credit arm, GSO Capital Partners, ended the quarter with more than $127 billion in assets under management, compared to more than $138 billion at the end of last year. GSO ended the year down 38 percent in fee-related earnings, with $50.9 million in 2018 compared to $81.6 million in 2017.

President and chief operating officer Jonathan Gray said the losses in credit AUM may be partially caused by the exit of its direct lending vehicles, including the publicly-traded FS KKR Capital Corporation, the former FS Investments Corporation business development company sub-advised by GSO that has since merged with KKR’s Corporate Capital Trust BDC.

However, Chae said on the call that the firm is continuing to rebuild its direct lending strategy and is “firing on a lot of cylinders”. The firm raised more than $1.8 billion this quarter for direct lending, bringing that total to more than $4.4 billion for the strategy this year.

“In the direct lending area, where we had exited our venture with Franklin Square, we are now rebuilding that business and have pretty good momentum about that,” Gray said.  “We have very positive momentum in credit and expect to see positive inflow in 2019.”

The firm also ramped up its CLO business this past quarter and year. Blackstone launched three CLOs during the fourth quarter – two in the US and one in Europe for a combined $1.8 billion. The firm launched 10 over the last year for a total $6.4 billion.

GSO’s performing credit had a gross return of 9 percent. Distressed strategy returns were down 3 percent.

Blackstone, in its entirety, finished up 9.9 percent year-over-year, and ended the year with more than $472 billion in assets under management, compared to $434 billion at the end of 2017.

Blackstone is a global asset management firm based in New York.