Blackstone’s Les Mezz –

At one point not too long ago, Blackstone Group was ready to shutter its mezzanine operations as the firm got swept up in the BDC craze. The allure of the business development company, with its never-ending supply of capital, was such that Blackstone was only one of many that had designs on floating a BDC. However, as quickly as the hysteria caught on, it ended when most groups with potential IPOs in the pipeline abandoned those efforts amid a lackluster reception from investors.

Fast forward more than a year later, and Blackstone is back in the market with its second mezzanine fund. According to Form D filings with the Securities and Exchange Commission, the firm is seeking $667 million for the follow-up effort, and has thus far captured roughly $314 million in commitments.

The mezzanine group is led by Howard Gellis, a senior managing director at the firm, who is joined by Salvatore Gentile, a senior managing director, as well as Mark Gudis, Vincent Lu and Brian Spenner, all managing directors.

Blackstone launched the mezzanine group in 1999, and set it up to primarily serve the middle market. The fund provides mezzanine tranches between $20 million and $100 million, putting it on the large end of mezzanine market.

Through the fund, Blackstone has invested in LBOs of 24 Hour Fitness, Bright Now! Dental, Baker Tanks and Vitamin Shoppe, among many others. The firm has also suffered a couple of disappointments through the fund, including its investments in Southwest Recreational Industries and HQ Global Workplaces, both of which had to go through bankruptcy proceedings.

But despite a couple hiccups, the mezzanine fund has made enough good calls to be in the black. The California Public Employees’ Retirement System (CalPERS), an investor in the first Blackstone mezzanine vehicle, indicates that as of Dec. 31, 2004, the fund had returned 1.2x its invested capital, and had an IRR of 7.8%, while a source familiar with fund said its returns are now closer to the mid-to-high teens.

According to the SEC filings, Blackstone has already lined up 20 investors for Fund II, and the filing outlined it is seeking a minimum of $10 million per limited-partner investment. Wafra InterVest Corp., a Kuwait-based placement agent, is marketing the fund to investors outside of the U.S.

Blackstone is currently in the midst of a massive fundraising drive, and now has three funds currently in the market, including its $11 billion primary buyout fund and a new $500 million distressed debt vehicle. The firm’s primary buyout fund, if it reaches its target, would set an industry record for the largest fund. The mezzanine vehicle, meanwhile, if its cap is hit, would be the thirdlargest mezzanine fund in the market this year, trailing only offerings from Citigroup and Prudential Mezzanine Partners. The new fund is smaller than Blackstone’s previous effort, Blackstone Mezzanine Partners I, LP, which raised $1.14 billion.