Blackstone’s Tactical Opportunities, on track to raise nearly $10 billion, is preparing for a coming wave of refinancing deals.
Launched in 2012, Tac Opps was designed by Blackstone to be a flexible, opportunistic investor of bespoke, mostly non-control capital in assets, markets and sectors not covered by the private equity giant’s other funds. An all-weather strategy, it is at home in moments of dislocation.
Such a moment has arrived, Tac Opps global head David Blitzer told affiliate title Buyouts, following “the fastest and highest rate rise in history”.
“I think we have yet to see a lot of the effects in the real economy of rate rises,” he said. “But we expect to see a ton of companies needing to refinance their balance sheets but that can’t refinance them in today’s environment at the debt levels they’re at.”
Businesses that refinanced when interest rates were low, and now have capital structures that are about to come due, will need equity, he said. “I think in most cases they’re going to be looking for structured equity” – a type of hybrid financing offered by Tac Opps.
The “wall” of refinancing, as Blitzer puts it, is one of the defensive opportunities he believes will “dramatically increase”.
“The market is just starting to get more interesting,” he said. “When I look out three to 12 months, it’s going to be even more interesting than it is today.”
COO Chris James, who with Blitzer founded Tac Opps, agreed. “I think this is a crisis. It’s just going to be slower moving. We haven’t seen the massive acute kind of dislocation like we saw during 2020, in large part because the real economy has been reasonably fine.”
In addition, he said, many businesses “filled themselves up with cash” in 2021, establishing “a capital runway to fund themselves”. Now, however, “that’s starting to bite”, with expensive debt and dilutive equity often unable to provide a solution.
Plenty of dry powder
Blackstone this month closed a fourth Tac Opps fund on $5.2 billion, up from $4.2 billion raised by a third vintage in 2019. It is also wrapping up capital raising for parallel vehicles, most of them separately managed accounts, expected to bring total investable capital to almost $10 billion.
Roughly one-quarter of Fund IV’s capital has been invested to date, leaving plenty of dry powder for the “more interesting” market described by Blitzer and James.
There are signs this new cycle of opportunities may already be emerging.
Since early last year, Tac Opps has been fairly quiet, doing mostly “credit-plus” deals because of stubbornly high valuations. In 2022, $2 billion was invested, “the lowest deployment in five years”, James said, and less than half of the record $4.8 billion invested in 2020.
In the spring of this year, things changed, with Tac Opps becoming more active in equity and structured equity investing. Since January, $2.4 billion has been committed or deployed, with a $1.5 billion outlay in the past three months alone.
The focus has been on deals like the majority investment in New Tradition Media, an out-of-home media operator. Another is the $2.3 billion debt financing of CoreWeave, a cloud provider of large-scale, GPU-accelerated workloads, led by Magnetar Capital and Blackstone.
Once a surge of refinancings and other defensive opportunities begins, it will be durable, James said. “Our bet is rates are going to be higher for longer. We’re not going back to a zero interest-rate environment.”
Exploring white spaces
Blitzer pioneered the idea of Tac Opps in the years following the financial crisis. He then spotted deals with nowhere to go, mostly because of a gap in capital supply. Fresh opportunities often suggested white spaces previously unexplored by Blackstone.
Tac Opps continues to explore white spaces, James said, citing technological change as a key source. He pointed to the example of CoreWeave, which is building high-performance computing infrastructure to support expansion of the AI industry. “That’s an emerging space. Literally, it’s less than a year old.”
Innovation is also always underway in sectors well known to Tac Opps, he said, such as insurance. “They’re innovating and they’re growing and that’s going to deliver new white space to us.”
“Our fundamental strategy has really not changed since we started,” Blitzer said. “I think the market is much bigger and the market is only going to get significantly bigger in the future.” What has changed, he said, is the scope of global resources commanded by Tac Opps and the verticalisation of its strategy.
This operational evolution, he said, “has enabled us to be much more pro-active on what we want to go after”.
James agreed, noting “the market has come to recognize the world of opportunities between private credit and private equity – namely structured equity – is now an established allocation. And that Tac Opps is firmly entrenched as an anchor tenant there for LPs and companies”.
“There are intermediated processes which broker Tac Opps-style investing to businesses that may not 10 years ago, eight years ago, five years ago have been aware this type of capital exists,” he said. “Where it really pays off is in times like this.”
New niche category
Tac Opps, today a core Blackstone platform managing assets of $34 billion, helped inaugurate a new niche investment category – broadly known as special opportunities – that has caught on among several members of the firm’s peer group.
At present, a dozen or so private equity shops offer the strategy or something resembling it. Among them are Apollo Global Management, Ares Management, Brookfield Asset Management, Sixth Street and TowerBrook Capital Partners.
Strategies vary in emphasis but often share features in common with Tac Opps, including a concentration on assets, markets and sectors that go beyond a firm’s other funds. They also tend to be all-weather in nature, on the hunt for opportunities in both up- and down-cycles.
While other special opportunities funds have amassed billions of capital in recent years, Blitzer is not concerned about the increased competition for Tac Opps.
“On all sides of the equation, this area is growing much faster than the capital set is growing,” he said. “And that’s a great place to be from our perspective.”
Tac Opps was earning an aggregate multiple of 1.6x as of 30 June, Blackstone reported. The combined net IRR on realised investments was 17 percent, and the total net IRR, 12 percent.