Blackstone’s GSO runs fund revamp on older credit pools

Blackstone Group’s private credit group, GSO Capital, is working on a process to allow investors who are primarily in its 2005-vintage special situations fund to cash out of their interests in the pool, three sources told Buyouts.

The secondary process would mostly involve GSO Special Situations Fund, a $3 billion distressed-focused hedge fund the group launched in 2005. The process also could involve small exposure to some other vehicles, one of the sources said.

Blackstone decided to wind down the Special Situations fund in 2017 and move investor capital into lock-up funds, Bloomberg reported at the time. It’s not clear if the secondary process is related to the shuttering of the fund.

Like other fund restructurings, GSO would create a new vehicle to house assets from the older fund, which are primarily credit investments restructured into equity stakes in companies, sources said. LPs in the older funds could choose to sell their interests in the pools or roll with the GP into the newly created vehicle. First-round bids to buy the assets out of the older fund were due in late July, sources said.

Houlihan Lokey is working as secondaries adviser on the transaction, sources said. Houlihan will continue to work on the process despite recently losing Paul Sanabria and Jeff Hammer, the co-heads of its illiquid financial assets practice that focuses on secondaries advisory work, sources said.

Total deal value is expected to fall somewhere between $500 million and $1 billion, sources said.

The Special Situations hedge fund focused on an event-driven strategy across long/short high yield, distressed and capital structure arbitrage, according to an investment memo from the New Jersey Division of Investment. It focused on middle market and small companies, particularly in stressed and distressed situations ripe for an activist role, the memo said.

Unlike private equity funds, hedge funds do not lock up investor capital for a decade or more, so assets under management fluctuate as investors contribute or periodically redeem investments. The New Jersey investment memo said the Special Situations fund was targeting $3.5 billion.

GSO’s distressed investing group was being led by Jason New. Blackstone in June said it hired Dan Oneglia from Goldman Sachs to co-lead the group’s distressed investing strategy, alongside David Posnick. Pensions & Investments said New would leave Blackstone by the end of the year.

The GSO deal is one of several being run by high-profile private equity shops this year. Bain Capital completed a transaction allowing investors in older Bain Capital Credit funds to cash out while giving the GP more time to manage investments, Buyouts previously reported. Neuberger Berman was the buyer on the deal, which also was facilitated by Houlihan Lokey.

Total secondaries deal volume in the first-half hit around $42 billion, according to surveys from Evercore and Greenhill Cogent. GP-led deals like fund restructurings and tender offers represented around 30 percent or more of that total first-half volume, the surveys found. Credit-focused GP-led secondary deals represented around 20 percent of all GP-led volume in the first half, which came in around $14 billion, Greenhill Cogent said.

Action Item: Check out the New Jersey Division of Investment memo here: