GSO closes second mezz fund on $4bn

Limited partners’ heavy appetite for mezzanine strategies helped Blackstone’s GSO team raise billions to take advantage of a historic opportunity for non-bank lenders in the uncertain markets, especially in Europe.

The Blackstone Group-affiliated debt shop GSO Capital Partners has officially closed its second mezzanine fund on $4 billion, sources told Private Equity International. Blackstone officially confirmed the closing Wednesday.

The fundraising haul positions the firm to take advantage of the dislocation in credit markets around the world, especially in Europe.

“The fund's size and scale allows it to focus on the underserved upper mid-market, while its flexible structure enables GSO to be creative in solving a company's particular capital needs,” Blackstone said in a statement.

The fund has so far deployed $780 million in four companies, including providing financing to Sony for its acquisition of EMI Group's publishing unit, the firm said.

GSO Capital Opportunities Fund II launched in 2010 and attracted some big-name limited partners into the fold. LPs likely came into the fund based on the team’s robust track record; GSO’s debut mezzanine fund was generating a 16 percent internal rate of return and a 1.40x multiple as of 30 June, 2011, according to information from the California Public Employees’ Retirement System.

Also, the group charges management fees only on invested capital, rather than the more traditional model of charging fees based on capital committed.

Institutions that committed to GSO’s second mezzanine fund include the State of New Jersey, the Wisconsin State Investment Board, the Massachusetts Pension Reserves Investment Management Board and the Louisiana Teachers’ Retirement System.

The firm’s fundraising affiliate Park Hill Group helped market the fund. Blackstone touted the opportunity for non-bank providers of credit in the markets during an earnings call in February.

“The debt markets are shut in Europe,” Blackstone’s president Tony James at the time. The firm’s head Steve Schwarzman added: “Given the deficiency of capital likely to exist in Europe, we are well positioned to provide funding and solutions.”

GSO also was planning to launch its second “rescue capital” fund as part of its GSO Capital Solutions business, headed by David Posnick, Jason New and Dwight Scott. The fund’s target was not clear, and it’s also not clear if the fund has officially launched.

LPs like the mezzanine strategy because it offers potential returns in the range of mid- to- high teens, but also offers some protections in the capital structure because equity has to lose value before mezzanine financing begins to get affected. Also, mezzanine has a “current income” aspect that allows investors to receive quarterly or semi-annual distributions on the interest, which helps LPs reduce the j-curve effect of private equity on their portfolios.