Blackstone (Finally) Closes Record Fund

The Blackstone Group has completed the largest—and one of the longest—fundraising drives in private equity history, closing its fifth fund with $21.7 billion in capital commitments.

That doesn’t mean the firm’s fundraising machine is about to take a breather. Because Blackstone Equity Partners V has been around for three years, the firm has already invested 70 percent of the fund. Traditionally, Blackstone comes back to investors when dry powder falls below 25 percent, which means Blackstone expects to being raising the successor “shortly,” said Hamilton James, the firm’s president, in Blackstone’s first conference call with analysts last week.

It’s no wonder the fund is already 70 percent committed, given the number of big-ticket deals the firm has closed in the last 18 months: Biomet, Center Parcs, Michaels Stores, Freescale Semiconductor, Alliance Data Systems, Equity Office Properties and Hilton Hotels.

Still, with the exception of the Hilton deal, Blackstone has been relatively quiet since closing the Equity Office acquisition at the beginning of the year. Indeed, James told analysts that Blackstone was “extremely frustrated” at being outbid by 10 percent to 15 percent in auctions in the first half of 2007.

At the same time, James said that the “discipline” Blackstone showed by not leaping at deals “is paying off very handsomely now. We have little in the way of hung-up deals. We have lots of dry powder. We have a fund in very good shape.”

Now that prices are starting to come down in a tighter credit market, returns should go up for Blackstone and other buyout firms, James added.

But the current scenario isn’t entirely rosy. Debt for big deals is still hard to come by, which means the number of completed deals will slow and mega deals are off the table for now, James said. Exits, too, will be more difficult and less frequent.

For Blackstone, a chillier environment means fewer fees, an important source of revenue for its public investors.

The New York-based firm began raising Fund V way back in 2004 with a $10 billion target. It seems modest now, but at the time it would have been the largest fund ever raised. Not long after, a fundraising arms race began. The Carlyle Group in March 2005 secured a combined $10.05 billion for its North American and European funds. Blackstone soon responded by going to $12 billion. What Blackstone didn’t do, however, was hold a final close.

Instead, the firm decided to push off the end-date to the third quarter of 2006 as deal opportunities continued to get larger. Blackstone had $15.6 billion by last fall, and asked its LPs for feedback on additional fundraising. Reports at the time suggested that Blackstone was looking to settle on an even $20 billion, but sources said that such speculation was premature.

The next update came this past March, when Blackstone’s IPO filing indicated that the fund had grown to $19.6 billion. Soon after, Buyouts reported that everything would be wrapped up by the end of July on around $22 billion.

Earlier this month, Blackstone announced the final close on $21.7 billion, making it the largest buyout fund raised and topping a $20 billion GS Capital Partners vehicle that was partially raised from employees of parent Goldman Sachs.—D.P & J.H.