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UPDATE 1-Blackstone eyes US$7.5bn for mezzanine debt

(Adds market commentary)

NEW YORK, July 7 (LPC) - Private equity firm Blackstone Group LP’s credit arm GSO Capital Partners is seeking US$7.5bn for its fourth subordinated debt vehicle, according to investor notes from the Teachers’ Retirement System of Louisiana.

The New York-based asset manager has launched its GSO Capital Opportunities Fund IV (Fund IV), which is looking to surpass the US$6.5bn raised by its predecessor (Fund III), the pension fund notes show.

Fund IV will invest US$100m to US$450m in mezzanine debt for North American and Western European businesses that have enterprise values between US$500m and US$5bn.

The Fund IV portfolio will consist of between 30 to 40 investments with a hold period of three to five years.

Fund III posted a 6% net internal rate of return and a 1.1 times multiple on invested capital, according to Blackstone’s first quarter earnings results.

A GSO spokesperson declined to comment.

EVOLUTION

GSO raised its debut US$2bn mezzanine fund, which began investing in July 2007, Blackstone’s results show, at the cusp of the global financial crisis. Since then the market for direct lending has evolved significantly, said Steve Nesbitt, chief executive officer of investment advisory firm Cliffwater.

“The mezzanine market has evolved since the global financial crisis as direct lending, particularly unitranche (loans), has become a popular financing tool for private equity as an alternative to mezzanine financing,” he said.

“(Now) could be an attractive time to invest (in mezzanine debt), but investors also need to be cautious about being deeper in the capital structure during a time period where the length and severity of this recession is unknown.”

According to the most recent data available from financial data firm Preqin, global mezzanine debt funds collected US$1.6bn in the first three months of the year. Of the total amount of investor capital currently being sought by all private credit funds monitored, 18% of it would go to mezzanine debt funds.

If GSO meets or surpasses US$7.5bn, it would be one of the largest private debt funds raised, according to Refinitiv LPC data.

In recent years, a slew of global private debt firms have gained market share. Fourteen percent of the funds in the market are seeking more than US$1bn but targeting 49% of the aggregate capital across all private debt strategies, which include direct lending, special situations and distressed debt.

With US$121bn in assets under management, GSO invests in leveraged loans, high yield bonds, mezzanine debt and direct lending opportunities, among others. (Reporting by Andrew Hedlund. Editing by Michelle Sierra and Paula Schaap.)

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