Blackstone Targets Hedge Fund Stakes

Firm: The Blackstone Group LP

Fund: Pool to buy stakes in hedge fund managers

Target: $2 billion+

Blackstone Group, whose hedge-fund solutions business has $46.2 billion in assets under management, sees an opportunity to provide an exit for banks, insurers and other financial institutions that need buyers willing to take on what are particularly illiquid investments, a source familiar with the firm’s plans said. No target for the size of the new fund had been set, although it could attract between $2 billion and $3 billion, the person said. Blackstone Group will start marketing the fund to potential investors soon, hoping for returns topping 20 percent, the source added.

Blackstone Group declined to comment.

The new fund is the latest example of diversified private equity firms seeking to take advantage of traditional providers of capital on Wall Street that are taking a step back. Kohlberg Kravis Roberts & Co., citing the financing challenges of those relying on the traditional financial services industry, launched a new capital markets business in July, targeting mid-market companies.

But Blackstone Group’s new fund will be entering a niche space with few players. Its main competitor will be Neuberger Berman Group LLC, whose Dyal fund also targets hedge fund GP stakes in the secondary market. Goldman Sachs Group Inc.’s Petershill fund was also active in this area. While retaining control, hedge fund managers may choose to sell minority stakes in the GP, the entity managing the fund, to raise capital to seed their funds. With the new fund, Blackstone is now eyeing such stakes from those who have already bought them and aim to sell them.

“We have a fund that seeds new hedge fund managers, and by doing that owns a piece of the GP, and we have a new product that we are working on, which we will be announcing shortly but haven’t announced yet,” Blackstone Group President Tony James told analysts on a conference call last week, without elaborating.

Several backers of the $2 trillion hedge fund industry have seen the value of their stakes plunge as managers have failed to deliver on their promises. Hedge funds on average gained roughly 5 percent through September, according to hedge fund tracking firms, while the S&P 500 Index rose 16.4 percent over the same period. These mediocre returns follow a year when hedge funds on average lost 5 percent, while the S&P 500 finished 2011 roughly flat. This means many owners of hedge fund GP stakes may have to sell at a discount to what they paid if they want out of their investments.

What’s more, some financial institutions are shedding illiquid assets to bolster their balance sheet. Others are forced sellers, such as the estate managing the assets of bankrupt Lehman Brothers, that bought a stake in hedge fund manager D.E. Shaw & Co in 2007 and now needs to sell it.

Blackstone Group is the largest allocator of capital to hedge funds globally. The New-York based firm is the world’s largest alternative asset manager, also active in private equity, real estate, credit and financial advisory.

(Greg Roumeliotis and Katya Wachtel are correspondents for Reuters in New York.)