Mightiest PE firms shaken by Q3 credit, energy hiccups

In their third-quarter updates to Wall Street last month, the deal-makers said they didn’t totally escape unscathed from oil prices, which fooled many players by dropping further in recent months instead of recovering from their initial sell-off about a year ago.

“We have had on the credit side some investments in companies that had a lot of leverage that are suffering,” Blackstone President Tony James said on October 15. “I don’t want to say we have been flawless on this. We haven’t.”

Blackstone’s private equity portfolio in energy is still “ahead of the game, but we have definitely given back some value on a temporary basis,” James said. Overall, Blackstone has been investing in unlevered companies with “plenty of liquidity to ride through the next couple of years,” he said.

Still, Blackstone fared better than many. CEO Stephen Schwarzman said others in the space sustained severe damage by putting money into energy early this year, when oil was trading well above current levels.

“People got crushed,” he said. “They really got destroyed. Part of what you do in our business is you don’t do things where you think there is real risk, and I think we will be well-rewarded deploying our money at the right time.”

Schwarzman said the Blackstone Energy Partners fund, which closed on $2.5 billion in 2011, is now up about 25 percent, despite the hardships in the oil business. Blackstone drew in $4.5 billion last year for its sophomore effort, Blackstone Energy Partners II.

Volatility in credit markets

Josh Harris, senior managing director for Apollo, said demand for investments in the high-yield and bank debt market lagged behind the supply, leading to “backed up” conditions in credit for the first time in recent memory.

“The volatility in the credit markets is allowing us [Apollo] to put capital to work in more interesting situations,” he said. “The floodgates haven’t opened in distress, but we are starting to see some interesting stuff, finally.”

Harris focused his comments on the oil and natural resources sectors and said the firm tends to invest when prices fall.

“Everyone ploughed right into some of the stressed credit names and guess what? The leg down continued and got worse and people lost a bunch of money,” he said. “And so that led to unwinding of certain things and not only in energy, but across the board.”

Apollo’s expertise in the oil patch provides the firm with the ability to discern which companies have good reserves and which have higher cost reserves, Harris said.

Carlyle Co-CEO Bill Conway said energy prices “feel low” because they’re below the price at which sustainable development work can be done to serve long-term demand. But he added that wasn’t “a prediction they’re going up any time soon.”

Overall, Carlyle dealt with a “wide variation” across its portfolio, which includes credit, hedge funds and private equity investments. Carlyle’s corporate private equity units rose 16 percent over the year-ago period, while real assets, driven by commodity prices and credit markets were down 10 percent and 6 percent, respectively, over the past year.

Still, all the firms hold plenty of dry powder for deals. Carlyle said its hoard totals $48 billion including cash carry in its funds. Apollo said its funds hold nearly $30 billion of dry powder to invest across its platform. Blackstone said it’s raised about $100 billion in new capital in the past 12 months. KKR & Co didn’t break out a dry powder figure in its third-quarter report, but said its own balance sheet holds $14 billion of assets. In the second quarter, KKR said it had $28 billion in cash on its balance sheet plus uncalled commitments.

KKR said prices have come down in a number of sectors. “Where we see complexity, illiquidity and dislocation is where we are finding the most interesting opportunities,” said Scott Nuttall, the firm’s head of global capital and asset management. “And the volatility of the late summer has created quite a bit of opportunity for us, and it’s a wonderful thing to have locked-up capital to be able to invest behind the opportunities we see.”

Action item: See a chart of oil prices: http://1.usa.gov/1tmIiaL

Photo: A seismologist points to a seismographic graph showing the magnitude of the earthquake in Japan, on a monitor at the British Geological Survey office in Edinburgh, Scotland March 11, 2011. REUTERS/David Moir