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Blackstone’s GSO closes $2bn mezzanine fund

The private equity firm’s credit subsidiary, GSO Capital Partners, has closed its most recent mezzanine fund as demand for subordinated debt remains strong. The unit has also raised four CLOs and purchased $7.8bn in leveraged loans.

The Blackstone Group subsidiary GSO Capital Partners has closed its most recent mezzanine fund on its cap of $2 billion (€1.3 billion), Blackstone president, Tony James, said yesterday on the firm’s second quarter earnings call.

“The combined buying power of the mezz fund, in conjunction with its core hedge fund, makes GSO one of the top few mezz players in the world; there are very few competitors who can fund the large scale deals that GSO can today,” said James.

Demand for mezzanine financing has risen sharply as banks remain reluctant to provide senior debt to finance private equity deals amid ongoing credit market dislocation.

Other firms raising large mezzanine funds include Goldman Sachs, which is targeting $20 billion; TCW, which is targeting $2.5 billion; and Lehman Brothers, which is targeting €1.25 billion, according to the Probitas Partners 2008 Private Equity Deskbook.

Including the mezzanine fund, GSO has raised $5 billion in new capital this year, among which were four collateralised loan obligation funds (CLOs), said James.

“We believe we are one of the very few firms who have the investor following to be able raise new CLOs in this market”, said James.

The credit unit also purchased three portfolios of leveraged loans in the second quarter aggregating $7.8 billion dollars. The leveraged loans were purchased at an average price of 85 cents on the dollar, with long term financing from the sellers making up 75 to 80 percent of the purchase price.

“We expect these transactions to generate 20 to 30 percent returns with very low risk of loss of principal,” said James.

Blackstone last year purchased leveraged finance-focused alternative asset manager GSO for $930 million to expand its credit capabilities.