Blackstone Group set a new slate of key executives on its massive distressed-investment fund. It was under threat of being forced to stop making new deals after pending senior-level departures, sources told Buyouts.
The leadership slate represents key executives on GSO Capital Solutions III, which closed on $7 billion last year. They were named as part of a process to avoid a key-person trigger that loomed after GSO co-founder Bennett Goodman, and Jason New, head of special situations investing, decided to leave the firm by year-end. In this case, Goodman and New had not yet left the firm and so Blackstone was being proactive in resolving the issue.
The new key-person trigger would go into effect under these two conditions, according to documents seen by Buyouts: first, if either Dwight Scott, GSO president and senior managing director, or David Posnick, co-head of distressed investing, leave during the investment period; second, if during the investment period any four out of these seven were to leave: Scott, Posnick, senior managing directors Paulo Eapen, head of European business; Rob Horn, co-head of energy investing; Dan Oneglia, co-head of distressed investing; Rob Petrini, co-head of performing credit investing; and Michael Zawadzki, co-head of energy investing.
As part of resolving the pending key-person issue, Blackstone also provided a 10 percent management fee discount during the investment period and a 10 percent carried interest discount on invested and future investment capital from the fund, the documents said.
Also, the firm eliminated the recyclability of capital on a retroactive basis and going forward, during the investment period, the documents said.
“We received very broad investor support for changes made to reflect the evolution and growth of our business,” a Blackstone spokeswoman said.
The fund’s issues arose after Goodman decided to retire, which Blackstone announced in August. Goodman was the last of GSO’s three founders to step back. Co-Founders Doug Ostrover left in 2015 and went on to co-found Owl Rock Capital Partners, and Tripp Smith departed last year reportedly to start his own firm.
Key-executive protections are in place to ensure that the leadership team that investors are backing when they commit to a fund stay to the end. This is a vital protection in private equity, where funds operate for 10 years or more.
When a key-person provision is tripped, the fund usually is barred from making new investments until re-approved by LPs. Generally this leads to negotiation between the GP and LPs that can include concessions like fee breaks.
GSO Capital Solutions Fund III had about $5.8 billion as of Sept. 30, 2019, according to Blackstone’s third-quarter earnings report. It was producing a 1.1x multiple on total investments and a 10 percent net internal rate of return, the report said.
GSO closed Capital Solutions II on $5 billion in 2013, at which time the firm was managed by Scott, Goodman, Smith, Ostrover, Tim White and Michael Whitman, according to an investment memo from the Fresno County Employees’ Retirement Association.
Scott now leads GSO, while Whitman is head of private origination for the group. White left in 2012 and formed Dunes Point Capital.
Fund II was generating a 1.1x multiple on total investment and a 1 percent net IRR as of September 30, according to the third-quarter earnings report. GSO, which Blackstone acquired in 2007, closed its debut Capital Solutions fund on more than $3.25 billion in 2010.
Update: This story was updated to include a statement from Blackstone.
Action Item: Check out Blackstone’s third-quarter earnings report: https://bit.ly/33USPhL
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