New GSO BDC prepares for take-off in second quarter

GSO Capital Partners is in “advanced fundraising talks” with anchor investors for its new direct lending business, Blackstone executives said on Thursday’s first-quarter earnings call.

Earlier this month, GSO, the New York-based credit arm of Blackstone, formally ended its sub-advisory relationship with FS Investments’ vehicles, the business development companies to which GSO provided investment advice for the past decade. Blackstone will use a portion of the $580 million pre-tax proceeds it received upon GSO upon ending its relationship with FS to pay a special cash dividend of 30 cents a share over the next three quarters.

The new direct lending platform will come in the form of a BDC rather than a private fund, according to a source familiar with the matter. It will be both an institutional and retail investor product, though the firm sees the most growth in the retail channel over the coming years.

GSO declined to comment on the form the new platform will take.

The firm saw a 5 percent fee-related earnings growth over the “past couple years”, chief financial officer Michael Chae said, but noted that growth will be dampened for several quarters after losing the fee stream from sub-advising the FS BDCs. However, in the medium to long term, Chae said the firm foresees FRE remaining stable or growing. Executives said the firm is confident it can replace the direct lending capital over the course of the next few years.

GSO once again made up the largest portion of Blackstone’s assets under management, comprising $140 billion of the $449.6 billion of the firm’s total AUM. On the credit side, GSO raised $7 billion for the quarter.

Earlier this month, the firm held a final close on its third distressed debt fund, GSO Capital Solutions Fund III, with $7.33 billion in committed capital. It raised $678 million for that vehicle over the first quarter. Among other credit fundraises, GSO held a first close on a “successor credit alpha fund” and closed two collateralised loan obligations for $1.6 billion.

Gross returns for performing credit stood at 3.2 percent over the first three months of the year, while distressed credit posted a 0.3 percent gross loss for the first quarter. GSO invested, deployed or committed $1.7 billion in credit and realised $2.5 billion over the same time period.

The losses in distressed debt were “idiosyncratic”, Chae said, noting it was a “name-specific” and no particular downward trend. He noted the energy names in GSO’s portfolio remained relatively stable in performance.

The firm is currently targeting $5 billion for its second energy fund, a follow on to GSO Energy Select Opportunities Fund. The investment period for Fund I, which posted a net internal rate of return of 19 percent, ends in November.

GSO’s total revenues for the quarter were $202.11 million, down 11 percent from the same time last year. Of this year’s first-quarter total, GSO pulled in $167.66 million in management fees for the quarter, an increase of 35 percent. Performance fees were $38.7 million, a decrease of 56 percent.