GSO performance gets on the mend

Blackstone’s credit arm posted strong returns for the second quarter in 2016 as its energy exposure rebounded.

GSO Capital Partners’ performing credit segment, which includes mezzanine funds and BDCs, posted 9.7 percent returns in the quarter, while the distressed funds delivered 7.3 percent. The performance bested Blackstone’s other segments, where private equity earned 2.5 percent in the quarter, hedge fund products were at 1.4 percent and real estate delivered 2.2 percent.

GSO devotes a large part of its investment book (about $11 billion) to energy assets, through dedicated private equity-style funds and the Franklin Square BDCs that the firm sub-advises. The last two quarters saw GSO posting negative or flat returns because of declines in energy investments. But oil is now trading at over $50 per barrel after bottoming out at $20-$30 around January.

“GSO had an excellent second quarter, marking a strong rebound following a particularly difficult period in the markets,” said Blackstone’s chief financial officer Michael Chae speaking on the earnings call.

The credit segment’s total assets under management (AUM) reached a record $84.7 billion at the end of Q2, with $3.3 billion coming into GSO’s latest mezzanine fund, $1.2 billion for two new CLOs and $960 million in a new opportunistic fund focused on market dislocation.

The GSO Capital Opportunities Fund III, the firm’s third junior debt fund, is raising $6 billion. It’s already raised more than $4 billion past the second quarter and expects to hold a final close on its $6.5 billion hard-cap soon, according to executives speaking on the call. Last week, PDI reported on a new €412 million CLO issuance from the firm.

In the quarter, GSO deployed or committed about $1.7 billion mostly to European deals and new investments in the energy sector. This included the largest European unitranche deal (over €600 million) yet from an alternative lender. The financing backed the merger of Reichhold and Polynt, which are forming a global specialty chemicals company. The new company is co-owned by Black Diamond Capital Management and Investindustrial, a global private capital firm.

Speaking broadly about market conditions on the earnings call, chairman and chief executive Steve Schwarzman said it’s been a strange and tumultuous period in the markets for some time.

“We are executing against a macro background categorised by uncertainty, low and slowing growth and astonishingly low interest rates,” he said. “We’ve been going through an extraordinarily strange period.” Schwarzman also noted China’s adverse effect on the debt markets.

Schwarzman mentioned Brexit sent currencies and indices off kilter towards the end of the quarter, but those have since rebounded. “Brexit has created a fallout in the markets and politics, but the impact has largely reversed in the third quarter. In the near term, transaction activity remains slow in the UK because of uncertainty,” Schwarzman added.

Blackstone’s total AUM grew to a record $356 billion, up 7 percent year-over-year. This included $21 billion worth of new fundraising in the quarter across the firm’s business lines.