Blackstone: Mid-Market Buyout Shop?

Turns out that The Blackstone Group is just a mid-market firm at heart.

That was one of the messages the New York-based buyout shop worked hard to deliver during the conference call it held August 6 in the wake of its second-quarter financial report. The tone of the call was fairly upbeat, as Blackstone posted economic net income of $173 million, or 16 cents a share, a performance that was well ahead of Wall Street’s consensus estimate of 9 cents a share.

Blackstone has about $14 billion in dry powder left for investments in private equity, and it “continues to be a preferred client of banks, and we can still obtain funding for good companies and middle-market companies generally, which is our sweet spot,” said Steven Schwarzman, the firm’s chairman, CEO, and co-founder. A similar identification with the middle market was echoed later in the call, when Tony James, the firm’s president and chief operating officer, explained how Blackstone’s multi-billion dollar investment vehicles are different from other mega-funds.

“We’re sort of a very big fund, a big platform, but we’ve always focused on sort of medium-sized deals, more the mid-market deals,” he said during the question-and-answer portion of the call. “We think that’s the sweet spot where we can bring the operating platform, the clout, the leverage with lenders, the proprietary deal flow, the things [that] it takes scale to have, but we apply…to the less competitive mid-market. And so our positioning is a little unique there.”

Blackstone sprinkled disclaimers about the difficult economic conditions throughout the call. But the firm also issued a steady stream of positives with regard to its own situation. For example, despite continued pressure on consumer spending, Blackstone still expects two-thirds of the companies in its private equity portfolio to post flat to positive EBITDA growth in 2009 versus the prior year. That compares to only 35 percent of the companies in the S&P 500 index forecasting year-over-year earnings improvement, according to Schwarzman. “Basically, we are performing two times as well as the companies in the S&P index; which is one of the things that makes private equity so special,” he said in his opening remarks.

Another bright spot was CoreTrust, Blackstone’s group procurement platform, which the firm said saves portfolio companies an estimated $210 million per year by pooling purchases of items like computers and office supplies, and services like overnight delivery. The firm said the savings figure “keeps rising” and that 80 percent of its portfolio companies are participating. Blackstone is making similar inroads with Equity Health Care, its equivalent platform to share the costs of health care insurance. The firm said its portfolio companies were on track to save $50 million in 2009 through the use of Equity Health Care and it has set a goal to bring that number up to $140 million in a couple of years.

Dealmaking has slowed for Blackstone. The firm called down $338.3 million in the second quarter ended June 30. That’s up from $196.1 million in the first quarter, but well below the $775.9 million deployed in last year’s second quarter. In fact, add up all the capital Blackstone’s called down for the business in 2009 ($534.4 million), and it’s still more than 30 percent below the amount it deployed in last year’s second quarter alone. At the same time, Blackstone has been spending time on debt repurchases, swaps and other strategies to give its current portfolio more breathing room. “You can actually change the capital structure and, in doing so, reduce [the] original purchase price,” James said.

On the fundraising front, James said that he expects the final total for the firm’s latest general buyout fund, Blackstone Capital Partners VI, to be “well into the teens” in terms of billions of dollars. That figure would be less than the pool’s original stated target of $20 billion, but in keeping with media reports in the past few months that the firm had lowered its expectations to $15 billion. To date, Blackstone has secured $8.6 billion for the fund, showing scant momentum after holding a first close on $7.1 billion in pledges in September 2008.

The company is currently investing in buyouts through Blackstone Capital Partners V, the $21.7 billion fund it closed in September 2007, and it has about $6 billion left of dry powder from that pool, according to a recent report from, the sister Web site of Buyouts.