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GSO raises $6bn distressed fund, expects slow deal activity

The credit platform showed a 14% annualised net internal rate of return as of 30 September.

GSO Capital Partners continues to build up its distressed war chest, despite expectations that deal activity in the space will likely remain stagnant for the foreseeable future, executives said on Thursday’s third-quarter earnings call.

Blackstone’s credit platform raised $4.7 billion for its third distressed flagship fund, GSO Capital Solutions III, during the quarter, bringing the total raised for the fund to $6 billion, according to earnings materials. But management said on the call that the firm sees more opportunities in performing credit investments compared to distressed credit over the next year or so.

Tony James, Blackstone president and chief operating officer, said on the call there are “not as many opportunities as we’d like to see” in the distressed space, due to strong economies and credit markets that have allowed stressed companies to secure financing outside of drawdown distressed vehicles.

However, there will always be “companies that stumble”, either because of factors outside their control like interest rates, regulatory or secular changes or “self-inflicted wounds” like poor management, which open up opportunities for drawdown distressed debt funds, he said.

“We’re not raising these funds to take opportunity only during one moment in the markets,” James said. “This is an asset class you have to commit to throughout the cycle.”

The distressed strategies in the GSO portfolio showed gross returns for the quarter of 2.7 percent, while its performing credits showed a 4.1 percent return, according to earnings results. The credit platform showed a 14 percent annualised net internal rate of return as of 30 September.

GSO deployed or committed $3 billion during the quarter, “capitalising particularly on investment opportunities in Europe and the energy sector”, the quarterly presentation read. On 16 October, Blackstone also acquired Harvest Fund Advisors, an investment management firm focused on US midstream energy investors that “will be integrated into the credit business in the fourth quarter”.

Blackstone’s credit portfolio grew to $99.48 billion in total assets under management by the end of last quarter, up from $89.33 billion as of 30 September 2016, with a 1.3x multiple of total invested capital. GSO earned $16.07 million of investment income over the quarter, compared to $11.75 million third quarter last year.

Despite higher asset prices around the globe, Blackstone has been able to find “plenty to do around the world” and is optimistic about investing in the US, Stephen Schwarzman, chairman and chief executive officer, said on the call. “The US employment picture is strong and tax reform has the potential to further accelerate growth,” Schwarzman said.

The firm deployed $10.9 billion last quarter and $31.1 billion year-to-date across the businesses. Blackstone’s total assets under management reached $387.45 billion by 30 September.