The Blackstone Group’s Tony James does not expect rising interest rates to affect his firm’s burgeoning credit business, which had grown by 23 percent to $62 billion year over year, according to a second quarter earnings report released Thursday.
“I expect people are uncertain about that, particularly given the fact that we made 20-40 percent return on our credit products in the last year. People are saying, ‘Gee, did you just ride this bull market for credit?’” James said in an earnings call on Thursday.
“We have essentially zero interest rate risk in our credit business today. We have almost no long-dated fixed rate securities. Our guys have been anticipating this backup for a long time, and they’re short maturity, they’re floating rate and they have a lot of cash. So [those] attributes actually mean that they’ve been hoping for a backup and are well poised to take advantage of it. And they’re actually thinking this is great.”
The report attributed the credit business’ growth to new fund launches, capital raised through its long-only platform and additional commitments to GSO Capital Partners’ rescue lending fund, which is expected to hold a final close on its $5 billion hard-cap this month, James said.
Although rising interest rates will likely have little effect on the firm’s ability to execute its credit strategy, it will impact its ability to execute dividend recapitalisations for its private equity portfolio companies, James said.
“Most of the recaps are behind us, because you had company results coming up and lower interest rates,” he said, adding that Blackstone tends to execute fewer dividend recaps than some of its competitors. “We have a pretty robust equity market and hopefully a recovering corporate acquisition market so I don’t expect a lot of recaps coming up for us.”
Blackstone invested $577 million in capital through its credit strategies arm on the quarter with an additional $213 million committed, according to an earnings report. The firm’s credit strategies arm had invested $1.1 billion for the year through the second quarter.
“While deal flow for the industry was still on the light side, we put to work almost $600 million out of our drawdown funds and another $200 million committed as of the end of the quarter that had not been invested,” James said.
James also touched on the development of the firm’s Tactical Opportunities strategy, which invests opportunistically across several of the firm’s investment platforms – including credit. Tactical Opportunities raised an additional $324 million for the quarter, bringing its total committed capital to $3 billion, according to the investment report.
“You can expect added closings each quarter for a while – I think we have a cap on that of something around $5bn,” he said. “This is a small team in a new business with a lot of deal flow. We need to get our people focused on investing. So we’re not going to keep fundraising too much longer, but yes, we have more interest more investments coming.”
Blackstone Tactical Opportunities is something of a hybrid of a typical commingled fund and a separate account, James said. Although Tactical Opportunities operates as one pool of capital, certain investors enter the vehicle through separate accounts “with different areas they want to focus on”, James said. Investors include the New Jersey Division of Investment and The California Public Employees’ Retirement System.
“It’s a very, very diverse group of things. Hard assets in Brazil; it’s ships; it’s spectrum; it’s leases; it’s non-performing resi loans; it’s equity interests in some low risk; long duration assets; it’s all kinds of different things. And so far the results have been nothing short of spectacular. We’re delivering to our investors mid double digit yields and IRRs on these investments have been in the mid-20s.”