Blackstone Breaks Fund-Raising Record

There’s a new fund-raising king occupying the throne. The Blackstone Group revealed it has raised $6.45 billion for Blackstone Capital Partners IV, trumping Thomas H. Lee’s $6.1 billion Fund V, previously the largest private equity fund ever raised.

Additionally, Blackstone’s fund-raising efforts could go on a bit longer as placement agents “shoehorn” a couple of investors, meaning a final close on Fund IV has yet to occur, according to sources close to the firm.

Much the same way partners at Thomas H. Lee back in 1999 claimed having the largest fund made no difference to them, Blacktone’s president and CEO Stephen Schwarzman says topping the fund-raising record was not his firm’s goal.

“We just put one foot in front of the other and kept meeting people,” Schwarzman says. “From what I observed, in a time of relative uncertainty, more established groups such as ourselves, with a long track record, were more appealing to potential investors than newer groups, so we were beneficiaries, in that sense, to difficulties in the environment.”

By no means did Blackstone’s partners pull this fund off by themselves, however. The firm had not one placement agent, but two. UBS Warburg pitched the fund to new investors outside the U.S. while Credit Suisse First Boston, historically Blackstone’s sole placement agent, marketed the fund to North American investors.

A senior employee in CSFB’s private fund group says this situation with UBS Warburg was an interesting one, considering CSFB’s “strategic relationship” with Blackstone. CSFB two weeks ago assisted Blackstone in closing its European real estate fund and the firms are working together on another U.S. real estate fund, as well as other initiatives that could include a European telecom fund, the source says.

Evidently, when the fund-raising process for Fund IV commenced in early 2001, Blackstone told CSFB it had won the global mandate, but at the 11th hour, “very senior level people” at UBS committed to a significant amount of capital that CSFB could not match.

CSFB took the change in stride and the two-front effort was likely a factor in the fund’s record-breaking success, considering it originally had only a $5 billion target.

“We knew it was going to take a lot of work to find new money in North America, and we just focused on that,” says the CSFB source.

But the Blackstone name does go a long way, even in a difficult fund-raising environment.

“It’s a flight to quality in this market,” he says. “Blackstone is a quality institution and they’ve had outstanding performance over many, many years.”

Blackstone’s in-house marketing executive, Ken Whitney, is well regarded in the industry, as well.

All That Cash

Now that Blackstone is flush with cash, the question is, where will they put it in a relatively slow deal environment? Schwarzman says he isn’t worried; having a significant amount of capital is a good thing, he adds, especially coming out of a recession.

“At this particular time, given the dislocation in the stock market and the withdrawal of many strategic buyers, private equity in general ought to have a pretty good run,” Schwarzman says. “The new deal pipeline is beginning to flow again, and at significantly more realistic valuations compared to the last several years.”

Blackstone plans to average between $200 million and $300 million of equity per transaction and won’t get involved in deals that require less than $100 million of equity. This differs from the $4 billion Fund III in the fact that that fund’s deal sizes ran the gamut and Fund IV is committing itself to larger deals.

Investors representing almost 90% of the capital raised for Fund III have reinvested in Fund IV. Additionally, almost half of the investors in the new fund are new and 27% of the overall capital came from non-U.S. investors.

Limited partners in Fund IV include the New York State Common Retirement Fund, which committed $300 million; the Canadian Pension Plan Investment Board, with $200 million; the Massachusetts Pension Reserves Investment Trust, with $75 million; and the Houston Firefighters Fund, with $20 million, according to a source.

The new fund brings Blackstone’s total amount of funds raised for corporate private equity investing to more than $14 billion. Total committed capital across off the firm’s alternative asset businesses has reached about $25 billion.

On Its Own

No other firms are likely to surpass Blackstone’s fund-raising feat anytime soon. While the status of Kohlberg Kravis Roberts & Co.’s Millennium Fund has kept people guessing for several months, Henry Kravis recently told Private Equity Week’s sister publication Buyouts that while the fund has not and does not plan to hold a final close, it has reached between $5 billion and $5.4 billion, and the fund-raising process is pretty much behind them as the partners focus on sourcing deals.

Contact Leslie Green