Blackstone Supports Growth in Credit Business in Race to $ 1 Billion in Assets

Blackstone towers over most of its private equity counterparts with $ 731 billion in assets, but the company has had a soft underbelly for years: sluggish lending activity. Today, credit has become one of the fastest growing segments of the business, as part of a sweeping shift under the leadership of President Jonathan Gray.

Assets under management for the unit, which provides corporate loans backed by leveraged buyouts for other private equity firms, jumped 22% to $ 188 billion this year through September 30. Private equity assets under management increased 17% to $ 231.5 billion over the same period.

Blackstone is expanding in the space by launching low-cost funds and selling them to high net worth individuals who may not qualify for institution-friendly products like pension plans. The strategy replicated a decision Gray used to boost the growth of the company’s real estate investment trust, called BREIT.

It also marks a culture shift, as the hedge fund operations that once gave Blackstone its Wall Street cachet fall out of favor, and large fund managers who traditionally focused on private equity see greater opportunity in private equity. debt, where the addressable market could be as big as $ 40 billion.

The resurgence in credit activity is expected to help Blackstone in the investor dollar race against its major competitors, including Apollo Global Management, Ares Management and KKR & Co.

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Debt specialists Apollo and Ares have pledged to increase assets to $ 1 and $ 500 billion respectively in the coming years, while KKR has more than doubled its lending business this year, mainly by acquiring insurer Global Atlantic Financial Group. Only Ares has grown its own credit business as fast as Blackstone this year.

Several large credit firms have vied for the lead, granting $ 2.6 billion in loans this year for the leveraged buyout of by private equity firm Thoma Bravo. Blackstone walked away with the top spot by offering to back the full amount, said Dwight Scott, director of Blackstone Credit.

The company historically operated in the debt markets through GSO Capital Partners, a hedge fund manager acquired in 2008 and known for its large, aggressive and lucrative deals. The founders of GSO – Bennett Goodman, Tripp Smith, and Doug Ostrover – have all left Blackstone in recent years. The credit firm dropped the GSO name last year and shut down its hedge funds.

Blackstone’s separate hedge fund solutions business has shrunk to 11% of total assets, from 19.4% five years ago, according to earnings reports. John McCormick, co-head of Blackstone’s hedge fund-of-fund business, told colleagues last month that he plans to step down.

“The hedge fund solutions unit’s revenue and profits have doubled over the past three years and the business will continue to grow through new offerings and the hiring of seniors,” said a spokesperson. word of Blackstone.

The rebranded Blackstone Credit aggressively markets less risky and cheaper funds to individual investors.

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“It’s about reducing portfolio risk,” Scott said. Blackstone believes the low-fee products allow it to offer attractive returns to investors without seeking yield by buying debt with a higher chance of default, he said.

The credit overhaul is part of Blackstone’s goal of reaching $ 1 billion in assets by 2026. To achieve this, Gray encouraged Blackstone CEOs to take a thematic-focused investment approach. on fast growing industries. In credit, this translates into more lending to sectors such as technology and life sciences.

Blackstone earlier this year launched BCRED, a business development company, or BDC, which provides direct loans to midsize businesses. BCRED raised $ 9.4 billion through the sale of shares this year, mostly to individual investors.

Blackstone made its first major foray into credit by buying GSO for around $ 1 billion. GSO hedge funds have excelled in the big risky bets on distressed debt that have grossed up to $ 100 million each.

The company also partnered with Franklin Square Holdings, which launched a BDC in 2009. GSO made the loans and shared the management fees with Franklin Square, which raised funds from individual investors. Initial brokerage and management fees averaged 9.4% at the start of BDC, high enough to attract the attention of regulators.

Credit assets quintupled to $ 128 billion in the decade following the acquisition of GSO, the company having built a mix of BDCs, hedge funds and securitized bundles of low-rated debt called bonds. of secured loan.

Growth came to a halt in mid-2018 when the business with Franklin Square disbanded due to profit sharing and different growth strategies. Blackstone left the company in exchange for severance pay of $ 640 million. The last of GSO’s founders resigned soon after.

Credit assets under management grew 3.1% to $ 144.3 billion from April 2018 to the end of 2019, even as Blackstone’s overall assets grew 27%, according to reports on business results. Apollo’s credit assets grew 30.4% over the same period to $ 215.5 billion and Ares’ assets jumped 43% to $ 110.5 billion.

Blackstone has spent that time designing the terms and sales engine for its new BDC, from which it collects all management fees, said Brad Marshall, co-head of performance credit at the company. BCRED uses the same brokers that sell BREIT for marketing and charges a management fee of 1.25% and a performance fee of 12.5%. Most major competitors charge 1.5% and 17.5% -20%, respectively, according to Securities and Exchange Commission documents.

—Miriam Gottfried contributed to this article.

Write to Matt Wirz at [email protected]

This article was published by Dow Jones Newswires