Blackstone stays positive despite harder conditions(3)

Tony James, the US company’s president and chief operating officer, outlined its strategy to capitalise on tougher debt markets, including smaller deals and distressed debt investing, and warned that the credit environment may have a short-term negative impact on fees.

The Blackstone Group is shifting focus as credit market concerns dominate the private equity landscape, according to its president and chief operating officer, Hamilton “Tony” James.

“We’re starting to look directly at debt securities which are trading at distressed levels, but are not distressed from a credit perspective,” James told the 500-some analysts and reporters listening to the firm’s debut quarterly earnings call Monday.

Companies for which Blackstone had previously been outbid – a common occurrence earlier this year, he said – now seem to be “very attractive investments, where frankly, I think we may be able to buy the debt in these companies and get a higher return than [we would have on] the underlying equity”.

James made it clear during the debut earnings call that he feels the firm is in a good position, going so far as to say the market belongs to Blackstone at present.

“We have little in the way of hung up deals, we have lots of dry powder, we have a fund in very good shape and so I think this is our market, if you will,” James said.

“On balance, the return opportunities that we see in private equity are the best that we’ve seen in at least two years,” he said.

Though setting up public-to-private megadeals in light of the current stock and bond market conditions is “clearly harder”, and may impact Blackstone’s near term results in terms of softer set-up fees and delayed realisations or liquidity events, James said, Blackstone doesn’t “have any worries” about financing markets.

The 10 or so private equity deals Blackstone has backlogged, involving more than $500 million in equity, are on schedule to close this year, he said. And the firm sees the current credit crunch as an “imbalance of supply and demand” as opposed to “fundamental credit problems”, James said. “We do not see any signs of an economic slow down,” he added.

Blackstone continues to have a very strong deal flow – particularly with regards to minority investments in Indian companies – and is also looking to profit from the changing credit markets, James said.

Until the credit markets stabilise, James said Blackstone will also focus more on opportunities including smaller buyout deals, turnarounds, build-outs and the purchase of senior preferred stock, such as its $500 million investment last week in pharmaceutical company Stiefel Laboratories.

Several additional factors related to changing market conditions are giving the New York-based firm a leg up, he said. Banks have become more selective in issuing new loans, and “they are leaning toward their biggest and best customers”, he said.

Competition has also decreased, he said. “Small funds that were bootstrapping themselves with bridge equity are gone”, as are many “fringe players”, like hedge funds and sovereign wealth funds, who’ve jumped into private equity in recent years, James said. 

“I think the cumulative effect of that, and [that] certain of the big buyout funds, other large funds, are distracted or have a lot on their plate, [is that] the room suddenly feels pretty empty,” James said.