Blackstone nears close on $2bn debt fund

As Blackstone winds up fundraising for its second real estate special situations fund, the firm begins to look further down the risk spectrum for investments.

The Blackstone Group is nearing a final close on Blackstone Special Situations Fund II, a value-added real estate debt fund focusing on distressed investments.

The firm is using Park Hill Real Estate Group to assist in the fundraising and is targeting total capital commitments of $2 billion, with minimum commitments of $10 million. A final close is anticipated in February.

According to documents obtained by PEO's sister web site PERE, the fund currently has $1.5 billion in equity commitments, including a $500 million separate account with an undisclosed sovereign wealth fund that invests alongside the fund. Blackstone anticipates closing on an additional $500 million in commitments by year end, bringing total capital commitments to roughly $2 billion. Furthermore, the firm will commit $50 million in capital to the fund plus additional equity from senior managing directors, bringing the sponsor’s total commitment to roughly $90 million. A Blackstone spokesperson declined to comment.

Blackstone presented before State of Connecticut’s Investment Advisory Council on Wednesday, and the state treasurer, Denise Nappier, is likely to approve a commitment to the fund within the next couple of weeks, a spokesperson for the pension plan said. As a new investor in the fund, the Connecticut Retirement Fund Plans and Trust Funds will only have exposure to deals completed in the future and will not have exposure to deals already completed.

Blackstone Special Situations Fund II is a continuation of the investment strategy implemented by the firm’s first special situations fund, except in a closed-end format and with a focus solely on the US. The fund’s objective is to provide investors with attractive risk-adjusted returns investing, directly or indirectly, in private real estate or real estate-related debt.

Debt typically is purchased at a price that is significantly below the peak market value of the underlying asset or will be originated at spreads higher than historical ones, according to the documents. The fund, which anticipates holding such debt to maturity or to some period after maturity, is expected to generate a net internal rate of return of 10 to 12 percent with equity multiples of 1.5x to 1.7x, consistent with a value-added return profile.

Since its inception in 2008, the fund had been focused on super senior CMBS bonds but, with the substantial tightening of spreads beginning in mid-2009, that type of investment has been declining as a percentage of the fund’s total assets. Based on current pricing, the fund will make investments further down the capital stack, such as junior investment-grade CMBS and B pieces, the documents state. Over the next 12 to 24 months, the fund expects to generate up to two-thirds of its returns from current income and the remainder from appreciation.

Currently, the fund has $750 million in commitment capital on which to draw for investments, not taking into account additional capital expected to close, and it boasts more than $3 billion of potential opportunities in its pipeline. Of that pipeline, a significant portion of those potential transactions are concentrated on new loan originations, which have the potential to generate high cash-on-cash returns. The fund currently is invested in a mix of fixed- and floating-rate CMBS, mezzanine debt, preferred equity, term loans and whole loans.

The investment period for the fund is four years from the effective date, which commenced in June 2009, and the term is four years from the last day of the investment period, subject to two one-year extensions. The management fee is 1.5 percent but reduces to 1.25 percent on commitments of at least $250 million.

The waterfall distribution is 100 percent to investors until they have received their capital contribution plus an 8 percent preferred return, followed by a 50/50 split until the general partner achieves 15 percent of cumulative distributions and an 85/15 split thereafter.