Blackstone to Acquire Hedge-Fund GSO for $930 Million

Blackstone to Acquire Hedge-Fund GSO for $930 Million

Jan. 10 (Bloomberg) -- Blackstone Group LP, the world's largest buyout firm, agreed to buy hedge-fund manager GSO Capital Partners LP for $930 million in cash and stock, a sign it expects debt markets to rebound from subprime-loan losses.

GSO, founded by former Credit Suisse Group executive Bennett Goodman, will add $10 billion in leveraged loans and distressed debt investments to Blackstone's $35.8 billion in hedge-fund assets, Blackstone said today in a statement. The company, which also announced a $500 million stock buyback, rose the most in New York trading since it went public in June.

Chief Executive Officer Stephen Schwarzman is expanding the New York-based company's debt business after the collapse of the U.S. subprime-mortgage market forced investors to shun all but the safest assets. The cost of credit required to fund leveraged buyouts has more than doubled since June, limiting Blackstone's fees and profits from buying and selling companies.

``Getting debt financing is hard,'' said Paul Schaye, managing partner of New York-based Chestnut Hill Partners, which helps buyout firms find investments. ``Some firms are saying, `We're not just going to be a private-equity firm.' ''

The acquisition may help increase earnings amid a slowing U.S. economy, Schwarzman and Blackstone President Hamilton James said on a conference call today.

``Now is a fantastic time to be growing this business globally,'' Schwarzman, 60, said on the call. ``It takes a little bit of internal fortitude to it because the world looks a little messy.''

Deals Slow

Buyout firms announced $202 billion of deals worldwide in the second half of 2007, two-thirds less than in the first six months, according to data compiled by Bloomberg. Blackstone manages $98.2 billion of assets, including a $21.7 billion LBO fund that is the world's largest.

The company, which has lost 41 percent of its value since its initial public offering, rose $2.03, or 11 percent, to $20.13 at 2:48 p.m. in New York Stock Exchange composite trading, after gaining as much as 12 percent earlier in the day.

Schwarzman, who founded the company with Peter G. Peterson in 1985, raised $7.3 billion in the IPO, priced at $31 a share, and the sale of a minority stake to the state-controlled China Investment Corp.

The stock had fallen as investors balked at buying debt committed to leveraged buyouts. The credit markets have yet to recover, James said on the conference call.

``There are no signs of loosening'' in those markets, James said, noting equity markets also are sluggish. ``The U.S. economy is clearly beginning to show signs of weakness.''

Investment Opportunities

Those troubles provide opportunities for investments through vehicles such as GSO's, James said. GSO's assets include about $4 billion in its credit hedge fund, $1 billion for mezzanine investments and $5 billion in collateralized loan obligation funds, Goodman said on the call.

Blackstone participated in some of the biggest deals of 2007, including the $39 billion purchase of Equity Office Properties Trust. At the time of its IPO, Blackstone owned companies with about 375,000 employees and $83 billion in annual sales, more than Microsoft Corp.

Blackstone managed more than $40 billion in hedge funds and other alternative assets as of Sept. 30, more than its $33 billion of corporate private-equity assets. Blackstone also had about $25 billion in real-estate assets.

Milken, DLJ

The GSO takeover reunites Goodman, 50, with former Credit Suisse colleague Hamilton James. James, 56, left in 2002 and is now Blackstone's president. Goodman, the New York-based head of Credit Suisse's alternative-capital unit, left three years later to start GSO with Tripp Smith and Doug Ostrover, former co-heads of leveraged finance at the bank.

Goodman began working with Michael Milken at Drexel Burnham Lambert Inc. in 1984. Four years later he joined Donaldson, Lufkin & Jenrette, helping to make it the No. 1 underwriter of high-yield securities during the 1990s. Credit Suisse bought DLJ in 2000.

Schwarzman said today he had tried to hire Goodman twice to build up Blackstone's credit business. Blackstone was an original investor in GSO's main credit hedge fund.

Fixed-income hedge funds gained an average of 2.7 percent in 2007, compared with 10.4 percent for all managers, according to data compiled by Hedge Fund Research Inc. of Chicago. Funds that invested in distressed debt returned 6.3 percent. Merrill Lynch & Co. bought about 20 percent of New York-based GSO in May for an undisclosed amount.

Earnings Incentives

Blackstone will pay $620 million in cash and stock when the takeover closes, and as much as an additional $310 million depending on GSO meeting earnings targets over the next five years. With the planned share buyback, the acquisition will not reduce earnings, Blackstone said in the statement.

Hedge funds, targeted at insurance companies, pension funds and individuals with at least $1 million, are mostly private and unregulated pools of capital where managers can buy or sell any assets, participating substantially in the profits of the money invested. Hedge fund clients typically pay fees of about 2 percent of assets and 20 percent of investment profits.

Private-equity firms, investment banks and insurance companies are raising mezzanine funds, as well as pools to buy distressed debt as alternatives to buyout funds. Goldman Sachs Group Inc., TCW Inc. and New York Life Capital partners are raising more than $30 billion for mezzanine funds that make loans to companies as investors shun traditional LBO debt.

Buyout firms including Blackstone, Kohlberg Kravis Roberts & Co. and Apollo Management LP are raising money to buy debt committed to last year's record amount of leveraged-buyout announcements.

BLOOMBERG