GSO raises billions for market dislocation

The debt affiliate of The Blackstone Group has stopped marketing its second mezzanine fund, which is set to hit its $4bn hard-cap in the next few months. GSO also is launching its second ‘rescue fund’ that will come in handy in Europe.

The Blackstone Group’s credit affiliate GSO Capital Partners is positioning to take advantage of the huge opportunities for non-bank credit providers, especially in Europe, through various investment vehicles the firm is raising or bringing to market in the next few months.

As Europe continues to battle with a sovereign debt crisis that has raged since last year, financing has been harder to come by. Firms like Blackstone with the capacity to extend credit, either into distressed or more routine situations, have found a wealth of opportunities in the region. Other firms focusing on credit investments in Europe include Kohlberg Kravis Roberts, Avenue Capital and Oaktree Capital Management.

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

The debt markets are shut in Europe.

Tony James

GSO, which Blackstone acquired in 2007 for close to $1 billion, will have plenty of capital to take advantage of the market dislocation in Europe is through its mezzanine business. The team has stopped marketing its second mezzanine fund, which was targeting $3 billion but is expected to hit its $4 billion hard-cap in the next few months. GSO is keeping the fund open to allow in some last minute limited partners, according to market sources, similar to what Blackstone did with its $16 billion sixth fund, which stayed open for months waiting on last minute commitments.

The team has already had success with mezzanine investments, as its debut fund was generating a 15.98 percent internal rate of return as of 31 March 2011, according to information from the California State Teachers’ Retirement System.

GSO also will launch its second “rescue capital” fund as part of its GSO Capital Solutions business, headed by David Posnick, Jason New and Dwight Scott. The target of the second rescue fund is not clear and the firm declined to comment.

The first Capital Solutions fund closed in 2010 on $3.2 billion, though it started investing in 2009 and has deployed around 70 percent of its capital. The fund has recycling provisions that allow the team to reinvest distributions to keep the vehicle investing.

The Capital Solutions fund was generating a hefty 27.5 percent IRR as of 31 March, according to CalSTRS data.

GSO’s capital solutions team is focused on “rescue” situations, or companies in need of liquidity or restructurings due to potential breaches of debt covenants, impending loan maturations, cyclical downturns or other funding needs. The second rescue fund will focus on European companies more than the first fund, which does not have much exposure to Europe, sources told Private Equity International.

“There are many great business franchises facing liquidity issues,” said Bennett Goodman, co-founder of GSO and a senior managing director at Blackstone.

On both funds, management fees are only charged on invested capital, a term that LPs generally like when they can get it.

Europe is on the minds of LPs this year as a point of concern but also as a point of interest as many institutional investors are interested in building exposure to the region to capitalise on the dislocation.

The uncertainty in Europe “makes the region more attractive”, according to one LP who spoke to Private Equity International in a recent interview. “We won’t be able to pick the bottom necessarily but if we make commitments now we’ll be there just before the bottom.”

GSO produced some solid returns in its full-year 2011 earnings, which were revealed Thursday. While the firm's private equity business experienced declines in performance fees (offset by increases in fee revenue), the firm's mezzanine funds returned 28 percent for the full year 2011.